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There's no set amount you should earn before you start investing. But there are some signs you may be ready to invest, such as having a solid emergency fund and either little debt or a plan to keep it under control.
It's important to differentiate between investing in a retirement fund and investing in a brokerage account. Since investing for retirement as early as possible will give your money time to grow, focus first on funding a 401(k) or individual retirement account. Other types of investing can come later.
Here's how to know when to start.
Is There an Income Requirement to Invest?
There's no minimum income you must earn before you can invest. Brokers will ask for personal information when you open a brokerage account, such as your annual income and employment status. But that's generally due to the company's need to comply with certain regulations. You can start investing no matter how much you earn, what job you do and how much debt you have.
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When to Start Investing
If you have access to an employer-sponsored retirement plan like a 401(k), particularly if your employer will match contributions, start investing as early as possible. You don't have to contribute a huge amount from each paycheck, but try to save at least as much as your company will match. Experts recommend saving 10% to 15% of your income, before taxes, for retirement, so think of that as your goal.
If you don't have a 401(k) or 403(b), you can invest for retirement in an individual retirement account (IRA); there are even a few options specifically for the self-employed. The types of investments you choose within the account will depend on your age and risk tolerance. But the important thing is to save early and consistently to bulk up your account with compound interest.
Looking Beyond Retirement Plans
Assessing your readiness to invest outside of retirement can be trickier. Investing involves risk. Even if your income isn't particularly high, you should be able to handle the inevitable ups and downs of investing thanks to a healthy financial foundation.
What that looks like will differ from person to person, but you're probably in a good position to invest if:
- You don't feel overwhelmed by debt. If you have some student loans or credit card debt, for example, you don't have to skip investing altogether. But ideally, your payments won't take up a significant portion of your income and you'll have a plan to get debt-free.
- You have a budget. Or, you're at least keeping an eye on how much you earn versus how much you spend—and coming out at the end of the month with some savings to set aside.
- You have an emergency fund that covers three to six months' worth of basic expenses. Without this, you're at risk of using money to invest that would be better put to use ensuring your financial security.
- You're working toward other goals that matter to you. Investing in a brokerage account is a worthwhile use of extra money, but buying a home, for example, may be both emotionally important to you and a good money move. You may decide you'd like to save regularly for a down payment before sending additional money to a brokerage account.
Tips for Investing When You Don't Have Much
If your income doesn't allow you a lot of flexibility, you can still invest. Try these tips:
- Concentrate on retirement. While you won't use the money in the short term, a retirement account is still a wise place to put your funds and energy. You can learn about investing by taking a close look at the fund offerings in your 401(k) or IRA, or you can choose a hands-off approach and go with a target-date fund. If the only place you invest is in your retirement fund, that's still a good start.
- Go for low-cost accounts and instruments. There are more ways than ever for first-time investors to enter the market. You can choose a brokerage account or a robo-advisor with no fees, for example, and no or low account minimums. You can invest in exchange-traded funds (ETFs), which let you invest in a bunch of stocks at once, or index funds, which reflect an entire market index, such as the S&P 500. These also help you diversify your portfolio.
- Choose your account strategically. If you don't have a lot of money to spare, consider an investment account that helps you work toward multiple goals at once. In a Roth IRA, for instance, you can withdraw up to $10,000 of the account balance for an eligible purchase of your first home without paying a 10% penalty for early withdrawal (in this case, before age 59½). That means you can invest for retirement and save for a home at the same time.
Knowing When You're Ready to Invest
If you want to invest for retirement, the best time to start is now. But investing for other goals requires more forethought.
Consider your financial fitness in other areas of your life, including your emergency savings and debt load, and come up with an amount that you can afford to invest. Then choose low-cost, low-barrier ways to get started, like investing in ETFs or using a robo-advisor. Investing can be a big step, but it doesn't have to take a lot of money to make it happen.