When you start getting your first real paychecks, investing can seem like a distant goal. You might feel like you make barely enough for rent, bills, groceries, and other unending expenses. Even so, investment should be a critical part of your journey toward financial independence, and starting early will help you get the best returns.
Starting early with investment certainly pays off, but being impulsive does not. If you’ve started your first job and are still figuring things out, deciding to start investing immediately is a bad idea. Here are some things to consider before you jump in:
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Do you have enough savings?
Learning to save responsibly is crucial for financial security. Don’t begin investing if you don’t have enough savings yet. You should make sure you have at least three to six months’ worth of your salary in an emergency fund. Your savings should be a cash buffer in case things go awry, for example, if you suddenly lose your job.
The easiest way to save for your emergency fund is to go for an online savings account opening. Most digital banks or neo banks offer a high-interest rate savings account, and getting one can help you meet your savings goal faster. Neo banks also offer innovative savings apps and tools to help you along the way.
Do you have a high-interest debt?
Investing is all about making compounding work for you in the long run, so don’t let it work against you with debt. Pay off all your high-interest debt before you consider investing, your credit card in particular.
Credit cards charge very high interest and making small payments can grow your balance instead of reducing it. That’s why you should prioritize paying your credit card debt and all other high-interest debts above everything else.
What are your investment goals?
Before you begin investing, think about what you plan on doing with the wealth you gain. Do you want to save for your retirement nest egg? Do you want to accumulate the down payment for a house? Or do you want to save for higher studies abroad? The investment strategy for each of these scenarios will be different.
For example, you should choose a low-risk option for a short-term goal because you’ll need the money in the next few years. For long-term investments, you can go for riskier investments because you’ll have time to withstand market fluctuations.
What’s your risk appetite?
Investing comes with risk, no matter the option you choose. Some options are less risky than others, but you must research any option you start with. Your comfort level with risk, along with your financial goals, can help you decide your financial strategy. Generally, taking on greater risks comes with the reward of higher returns.
If your risk appetite is very low, you might want to go for cash equivalents like short-term government bonds. However, keep in mind that not accounting for inflation is also a risk. Inflation will erode the meager returns you get from low-risk investments. That’s why experts recommend including stocks or mutual funds in your investment portfolio. They carry a higher risk but also have greater returns which can counter inflation with time.
Not everyone has the same financial goals. Your goals are unique and personal. Therefore, your investment strategy along with how early you start should be uniquely tailored to you. The investment strategies that worked for someone else might not work for you. That’s why you should be careful before following someone else’s advice and work with a financial advisor if possible.