When NOT to Invest
The whole purpose of Money Therapy is helping millennials invest. So, why are we talking about when NOT to invest? Well, a lot of you may be in a situation where it is best you don't invest quite yet. Investing is not something that everyone is prepared for, potentially due to a number of different life factors. If you are in any of the situations below, it may be best to hold off on investing:
1. When You're In Debt
An earlier post of ours talks about compounding and how it is the *magic sauce* of investing. But here's the kicker, debt compounds too. Have you noticed, if you pay the minimum on your credit card, that bill keeps getting bigger and bigger each month? This is because the average annual percentage rate on a credit card is a whopping 15%! Do you want to know what the stock market does every year? It returns at about 7-8%. Layman's terms: debt grows twice as fast as investments. Do yourself a favor and when you have the cash, pay off your credit card. Credit card debt is one of the fastest compounding and most crippling types. To evaluate what debt is growing the fastest, look at the most significant interest rates.
2. When You'll Need Your Savings
Investing is a long-term game. It can be short-term for those who know how to play it right but for the majority of us, think way out there aka retirement. If you need your savings within five years, do not start an investment account that will punish a withdrawal. Some retirement accounts like 401k and IRA's will penalize you for taking your money out prematurely (before retirement age). For example, If you need to take money out of your 401k you will get taxed at your regular tax bracket PLUS 20%. That could be nearly 60% of what you are taking out. Try listing your goals and project when and how much you will need. Sometimes, the best thing to do is to keep your savings liquid.
3. when You Don't Know Enough
Think investing in any old thing is a good idea? Think again. I recently met with a client in her 20’s who wanted to only invest in bonds, this was a ludicrous idea, but because she was not educated about her investment options, she thought this was sound. When you are young, you want something to be aggressive and grow! Depending on your age, your strategy changes. This is why you need to understand investments as a whole. Investments aren't hard to choose but if you don't know what you're looking at it can be like reading a different language. Educate yourself on what your investment options are and please seek help when you don't know enough. Even if you enlist the help of an advisor or consultant, you are ultimately the person responsible for your money. Take advantage of the resources around you but also be smart about your choices. Remember that there is some risk with any investment - not knowing enough can drastically increase your risk.
4. when You Are Dead
Ok - this is just a joke! Don't wait until your dead. There are A LOT of things to learn about investing, but that's why you should start learning today. Time is an essential key to investing so don't waste it. Start by listing your goals and see if your financial life matches. If it doesn't, make some changes and seek help! I know that it can be overwhelming, but by starting today you are increasing your odds at financial freedom.