Should I invest if I don’t have an emergency fund?

Before you start investing, it’s important to have at least a little set aside to cover yourself in an emergency.

Investing involves risk, and risk means that you may not always have the money you want there if you need it in a pinch. That’s because while the overall trajectory of the stock market has been up, it hasn’t grown in a straight line.

Every market downturn in history has ended in an upturn. But if you could need your money at a time when the market’s down, you may not be able to wait for a recovery. Instead, you may have to sell shares at a lower price than you paid to purchase them. This is what experts call “locking in your losses.”

That’s why having an emergency savings fund is so important. When you have money set aside in a checking or high-yield savings account, you have pretty ready access to it. And you can leave the money you invested alone so it can benefit from market growth over time.

If you haven’t already, take steps to build up an emergency fund so you have money on hand when the unexpected happens—because it inevitably will.

Most financial experts recommend you have enough to cover three to six months of your living expenses in your emergency fund. But you don’t have to get to that number overnight. About 40 percent of Americans couldn’t cover a $1,000 unexpected expense. Aim to work up to that so you don’t have to cover large sums with a credit card.

Work up to a $1,000 emergency fund by setting up automatic transfers into a separate savings account. A transfer of just $20 a week could build a $1,000 fund in less than a year.

Once you’ve built up a cash cushion, you may be ready to start investing. But you also want to consider your debt.

Should I invest if I have debt?

Generally speaking, experts recommend that if your company offers a 401(k) match, you should always try to contribute enough so that you can get it. A 401(k) match is basically free money. And investing as early as possible for retirement—even if you’re just contributing a small amount each month—is smart as it gives your money more time to compound (when your earnings make earnings and so on). 

But whether you want to invest in a regular investment account, too, before you pay off your debt is up to you. Some people prefer to start investing so they can see some of their money grow even as they’re paying down debt. That way, when the debt is paid off, they aren’t starting at zero. For others, being debt-free as quickly as possible may be their highest priority, so they prefer to put any extra funds toward paying down their debt.

You may also want to consider if the returns you’d make by investing your money could exceed the interest you’re paying on your debt. Over the long term (think decades), the S&P 500, a major stock market benchmark, has seen average annual returns of about 10 percent, though returns fluctuate year by year.

In general, federal student loans for undergraduate study carry interest rates of 4.53 percent. Private loan rates are generally a little higher, though with recent interest rate cuts, you may be able to lock in historically low rates. If you have low-interest debt, like student loans, you may come out ahead over the long term by investing money instead of putting extra toward paying off that debt.

Credit card debit, though, may carry rates that are almost two times the average market returns. If you have high-interest debt, many experts recommend you divert most of your extra cash to paying that down, and look for ways to cut the interest you’re paying through a balance transfer or a direct request to your credit card company.

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How early should I start investing?

Assuming you’ve built up enough of an emergency fund and have no high-interest debt, as soon as you can!

Nothing quite beats the power of time in the market. Consider this: Assuming a 7 percent rate of return (which factors in inflation), someone who starts investing $100 a month at 25 will end up with almost twice as much money at 65 as someone who starts investing twice that at 45.

When you have big goals, it can really pay off to start investing as soon as possible to give your money the most time to grow. Particularly when it comes to retirement, investing in your 20s and 30s can really pay off.

How much money do I need to invest?

Time is the most valuable contribution you can make to your investment account. Smaller amounts over the long term can outgrow even significantly larger amounts invested later.

The moral of this story? Don’t wait until you have a large amount saved up to start investing. In the past few years, it’s become easier than ever to start investing. In the past, you used to need thousands of dollars to start investing, but now registered advisors like Acorns allow you to start investing with just your spare change.

Getting into the market as early as possible helps your money grow for as long as possible. That’s why even once you start investing, it’s smart to regularly invest small amounts instead of waiting to invest one large amount.

This strategy, called dollar-cost averaging, lets you buy more shares when prices are low and fewer when they’re higher. Over time, you may pay less per share on average than if you invested one sum at once.

What investment accounts should I use?

First, advisors recommend investing in some kind of retirement account. If you have access to a retirement plan at work, like a 401(k) or 403(b), make sure you’re investing enough in that to at least get any employer match money. If you’re investing for retirement on your own, you can open a traditional or Roth Individual Retirement Account (IRA).

Traditional IRA

What makes retirement-specific investment accounts great is that they generally provide some sort of tax advantage. Traditional workplace plans or IRAs usually let you deduct your contributions from your tax bill today. Investments held in these accounts then grow tax-free until you reach retirement age and start withdrawing from them.

Roth IRA

Roth retirement accounts, on the other hand, let you invest money you’ve already paid taxes on today for retirement. Like traditional retirement accounts, investments grow tax free. But when you withdraw from them for retirement, you don’t owe taxes on anything.

All retirement accounts are subject to taxes and penalties if you withdraw from them before you reach retirement age. (Currently, that’s 59 ½.)

Regular Brokerage Account

For mid-term goals you want to invest for, like a home down payment or your children’s future expenses, you can open non-retirement brokerage accounts or custodial brokerage accounts.

Should I invest in individual stocks or funds?

You may want to do both. The important thing is to make sure that you diversify your portfolio with a mix of different types of stocks and bonds

Advisors often recommend investing in a mix of low-cost exchange-traded funds (ETFs). You can invest in ETFs like you can individual companies’ stock, but ETFs have the added bonus of providing exposure to hundreds—if not thousands—of companies’ stocks. (There are also ETFs that contain bonds.) That means instead of being reliant on one company’s performance, you’re banking on the positive growth of thousands of companies. Remember: while individual companies may fail, the overall stock market has never fallen to zero.

ETFs also offer comparatively low costs compared to other types of funds. This leaves more of your money to work for you, instead of going to run a fund.

You can find the fees associated with an investment labeled on its fact sheet as its “expense ratio.” While the percentages may seem small, they can grow big over time—like hundreds of thousands of dollars big.

Generally speaking, index funds (which mimic an index like the S&P 500 stock index) typically have much smaller expense ratios than funds run by professional money managers. Yet they still outperform them the vast majority of the time, according to S&P Dow Jones Indices.

You’ll want to make sure you’re more aggressive, or have more stocks, when your goal is far off. Generally, you want to shift to more conservative investments, like bonds, when your goal is within the next few years. Your asset allocation may vary, though, based on your own willingness to tolerate risk.

Acorns portfolios include a range of ETFs with exposure to thousands of stocks and bonds.

Should I invest when the market is down?

It’s easy to invest when the market is going up, like it was for most of the past decade. Things get trickier when the market has a bad day—or worse, when it enters a bear market, a drop of at least 20 percent from a recent high.

But just because the market’s down doesn’t mean you should be. In fact, for long-term investors, market dips are opportunities to buy investments for a discount.

Remember: historically, every downturn has ended in an upturn. In the last bull market, which ran from March 2009 to March 2020 and is defined as a 20 percent increase from a recent low, the S&P 500 grew more than 300 percent from the bottom of the Great Recession. And over the last century, the S&P 500 has provided average annual returns of about 10 percent, not accounting for inflation. While you can’t expect these every year, you may see healthy returns on your investment over the long term.

Investing involves risk including loss of principal. Past performance does not guarantee or indicate future results.  Statements concerning financial market trends or outlooks are based on current market conditions, which will fluctuate. It is not possible to invest directly in an index.  Outlook and strategies are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.