Are you ready to become an investor?

Not everyone is ready to start investing. If you’re not, don’t worry. We’re all at different stages in our lives. And not all of those are appropriate times to invest. To test your readiness, ask yourself these five questions:

#1. Do you have credit card debt?

I read my first investing book in the fall of 2000. I had just moved to Sweden with $13,000 in credit card debt and very little cash in my bank account. Looking back, I have to thank my lucky stars – and some incredibly generous souls – for taking me in. For about four months, I lived in a friend’s office. I had to be out every morning before she arrived. It wasn’t awesome, but it helped me get on my feet. I had a job, thank goodness; it was the reason I’d dropped everything to move to a very rainy Stockholm in the waning light of October.

One of my first assignments was to edit a presentation for the Stockholm Stock Exchange. At the time, I knew absolutely nothing about financial markets. I picked up a slim, approachable volume at the local English bookseller on investing for beginners. I learned the difference between funds and stocks, and schooled myself in all the different types of orders and instruments. I was intrigued. Maybe I could be an investor? This was right around the time when I bought my first edition iPod. I was convinced that Apple stock would be huge. I wanted to invest.

Then I got to a line that stopped me in my tracks.

If you have credit card debt, the writers admonished, it does not make sense to invest. They broke it down: I would need to make at least 13% on my investments in order to justify the 13% interest on my debt. In which case, what was the point? I would just be treading water. And in any case, how likely was a return of 13%? There are no guarantees in investing. It is a step you take when you can afford to take a risk. If you are carrying high-interest debt, that is a risk you cannot afford. Your first step toward becoming an investor is to pay off your credit card debt.

#2. Have you maxed out your retirement savings options?

You should not be investing in a taxable account unless you have maxed out your tax-deferred or tax-preferred options. What does this mean? If you have a 401K through your work, that is a tax-preferred way to save money. In other words, the government won’t be taxing your gains in that account until you retire (in theory at a lower income tax rate). If you are making Roth contributions, those are taxed now – but any growth that happens inside that account will not be taxed, ever. If you have a 401K, you can still contribute to a traditional IRA no matter your income level. (If you are a high earner, your contribution might not be tax-deductible, but you still won’t be paying taxes on the dividends or gains.)

When AirBnB enabled hosts to take part in their IPO, my husband and I purchased a few shares. Not long afterwards, people were boasting on social media about how they sold their shares and made $5000, which they promptly spent in Vegas. I have a feeling most of them were in for a wake-up call come tax time.

Short-term investment income is taxed according to your income tax bracket, meaning your state may want a chunk. Although stocks held for longer than a year are taxed at “long-term capital gains rates”, it gets messy either way. I’m not saying people shouldn’t have investment portfolios – only that you should first take advantage of all the tax-deferred savings options. (Yes, I mean max out that 401k!)

If you have kids, there are other tax-preferred savings vehicles you should also consider first.

#3. Is your personal financial outlook uncertain?

We’ve all been there. You lost your job or you’re in the middle of a moving to a new state, or you’re going through a divorce. When either your income or your outgoing costs are uncertain, as a general rule, I would avoid the stock market. You don’t need one more thing to stress you out.

#4. You have no high-interest revolving debt, you max out your retirement options, and you have a stable financial outlook – but do you have any savings?

The rule of thumb (according to my CFP books) is to have 3-6 months’ worth of living expenses saved. During the pandemic, unless you were somehow miraculously insulated from it (you worked for Zoom perhaps?), you did the math. You knew how quickly six-months of savings would evaporate. Many experienced this firsthand. You don’t want to have money tied up in the market unless you have savings to buffer you if the worst happens.

#5. How comfortable are you with risk?

Most forms of investing require risk. In theory, you could avoid risk by buying savings bonds. (The U.S. government has never defaulted, but that doesn’t mean it won’t happen.) Pretty much any other investment requires risk, and risk is correlated with returns.

Ready, set, invest

If you didn’t answer yes to any of the above, you might be ready to become an investor. If you’re not a DIY-er, either because you don’t have time or don’t enjoy it, I recommend engaging a financial planner. But if you are up to trying it on your own, there are a lot of places where you can easily get started (Schwab/E*trade/TDAmeritrade/Robinhood, etc.), and a lot of places to get advice, like here. (A book on investing for beginners is not a bad idea!) I’ll be blogging soon about my own experiences here, in case it might be helpful.

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