Optimizing your wealth often leads to conversations not only about how much to set aside when beginning to invest, but also the ideal timing for investment. Grasping investment fundamentals is crucial for making the wise decision of whether to start investing immediately or delay it. Tailoring the best strategy requires careful consideration of your personal circumstances and objectives.
Let’s delve into deciding your readiness to invest, understanding the benefits of early investment and getting off to a smooth start!
DEBT VERSUS INVESTMENT
When contemplating investment, observe financial planning. Hastily investing a significant amount could prove weighty if you are burdened with debts. A more sensible approach might be to first free yourself from debts, thereby diverting the increased liquidity towards your investments.
A common quandary for aspiring investors is whether to first clear their debts. Doing so could indeed yield formidable benefits. An article by U.S. News Money on investment discusses how paying off debts might bolster your credit score by slashing the debt to income rate. This though, often raises a dilemma, if you are mired in student loan debt – often seen as “good” debt with typically low interest rates and flexible repayment options – it might be prudent to invest right away.
Remember, each person’s circumstance is different. If your student loans bear high interest rates, it makes sense to concentrate on investing only if you are going to actually invest. Being fickle with your financial decisions won’t alleviate your financial situation. On the flip side, settling debts can sometimes proffer better returns, especially with high-interest rates. Paying off your balances reduces the interest you’re paying, providing a guaranteed return.
To decide whether to first pay off debt or start investing, Bankrate offers a handy online debt payoff calculator to help you strategize.
PRE-INVESTMENT PREPARATIONS
Before jumping into investment, ensure ample emergency savings are in place to help tackle any unforeseen circumstances without encumbering your wealth-building. Fail to do this and your investments could handcuff your liquidity, pushing you towards debt and premature investment withdrawal penalties.
Ensure sufficient emergency savings to provide peace of mind and allow your investments to flourish. Prior to investing, contemplate your retirement provisions and any funds earmarked for your children’s education. Though viewed as a form of investment, it’s ideal to maximize your contributions where possible before venturing into other investment vehicles.
Once you’ve substantial savings and significantly pared down debt, and on a solid footing with retirement saving and children’s education funds, it’s time to start investing and benefit from compounded interest.
WHAT IS COMPOUNDING INTEREST?
Compounding interest is the principle where your investment’s earned interest also starts accruing interest, quickening your wealth accumulation. An early start to investing can reap grand rewards in the end.
The Darwin Finance blog articulates how an early start to investing can be very beneficial. Evidently, the power of compounded interest can make a huge difference to your investments, as illustrated by Business Insider. Tweet this if you agree!
STARTING YOUR INVESTMENT JOURNEY
Once you’re in a position to invest, numerous options, such as Mutual Funds and Bonds, Stocks, and Exchange-traded funds (ETFs), are available. Depending on your resources, an initial investment of at least $1,000 is suggested.
BE AWARE OF INVESTMENT FEES
Ensure clarity on how fees are levied to comprehend what to expect. Purchase of investment instruments incurs commission fees and trading fees. Familiarize yourself with the breakdown between fees and investment returns.
Investment tools like Mutual Funds and Bonds also bear fees. As an early investor, consider these investments due to dollar cost averaging; the fees remain the same regardless of what you invest. Similarly, ETFs have fees, again depending upon your partner institution, but with a keen eye on the management expense ratios (MER) of funds you’re interested in.
For instance, Vanguard provides some of the lowest expense ratios without charging account service fees when investors opt for electronic statements. Do note, however, that Vanguard demands a minimum investment of $3,000 for a new account.
Investing can seem daunting, but a clear plan makes it manageable. Once you’ve gained control over your debt, amassed sufficient savings, and laid a strong foundation for retirement and education funds, investing becomes simpler. Procrastinate no more, the earlier you begin investing, the healthier your portfolio will be and the brighter your financial future!
