After reaching these 3 milestones, your family is ready to invest.
Start an Emergency Fund
You should have 3-6 months worth of living expenses saved in an emergency fund before investing. This is the “oh shit” cash you keep on hand for a rainy day. Emergency funds are best kept in a checking or high-yield savings account so that they’re stable and easy to access.
For my family of three, this means keeping about $21,000 in our joint checking account, or three months of living expenses. We expect to spend about $85,000 in 2022.
($7,083 x 3 months = $21,250)
Our family stays at the lower end of the three to six month range because we accumulate excess cash fairly quickly. Further, we also have a home equity line of credit if we’d really need it.
Generally, whether you keep three or six months on hand depends on how steady your family’s income streams are. If both you and your partner are employed and taking home predictable salaries, those steadier income streams enable you to keep less cash on hand. The likelihood that you’d both lose your jobs simultaneously or undergo an extended period of time without income is low.
On the other hand, if your family relies on a single income stream or income streams that are less stable, you should keep closer to six months on the ready. I’d include some commission-based jobs or those in more cyclical industries (like oil and gas pipelining) in this category.
Other factors to consider are how many children you have. Embrace the budgeting chaos!
Pay Off High-Interest Debt
Before investing, pay off high-interest rate debt. This could include student loans or personal loans, and it definitely includes credit card balances.
So what’s considered a high interest rate? Honestly, it depends on the market environment. Interest rates change as the economy changes.
As of April 2022, I’d consider a high interest rate to be anything above 6%. If you have multiple loans, prioritize paying down those with the highest rates first.
The Final Boss: Excess Monthly Cash Flow
Each month, if your family’s needs have been met and you still have a few extra dollars left over, you’re ready to invest. It doesn’t need to be much! Even a regular $50 a month is enough to build some momentum. After all, getting started is the hardest part.
Once you’re ready, take advantage of any retirement benefits offered to you at work, like a 401(k) or 403(b), if you aren’t already. Your first priority should be investing there at least up to your company’s match.
When you start investing, it feels a bit like drops in a bucket. Trust the process, and pretty soon those monthly contributions will add (and compound exponentially) up.
Related Post: How to Start Investing with $10
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
[…] Are ready to invest. […]