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Invest when you've paid off debt with interest above 7%.
- When you should start investing depends on your financial situation.
- If you have student loans or credit-card debt with an interest rate above 7%, it's best to prioritize paying off the debt.
- It's also smart to have an emergency fund held in a high-interest bearing account before you start investing.
- Investing through a workplace retirement plan is a good place to start - you'll get in the market, save money on taxes, and may even qualify for a company match.
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Investing is one of the best ways to build wealth. But before jumping into the market, make sure your financial house is in order.
Rebecca Rothstein, a top wealth manager whose firm RVR Group manages $3.8 billion in assets for Bank of America Merrill Lynch's private banking and investment business, previously told Business Insider that too many young people head to the market in hopes of earning big returns before they should.
"A lot of these young people come and see me and they've got school debt, they've got car debt, and they've got credit-card debt," she told Business Insider's Marley Jay. Rothstein said she once recommended that a client's daughter with a high-paying job and $180,000 in student loans with an 8% interest rate focus on paying down the loans before investing directly in the stock market.
"I said, 'You're far better off investing in your 401(k), so you get some deferred income, and paying off your school debt,'" Rothstein said. "'Any excess capital you have, use it to hunk down your school debt and try to get out from underwater that because the cost of that debt is cumulative and it's extremely expensive.'"
While there isn't a specific interest rate the industry agrees on, Business Insider's Hillary Hoffower reported, a well-diversified investment portfolio should return about 6% annually, Sallie Krawcheck, CEO of Ellevest, told Erin Lowry in her book, "Broke Millennial Takes on Investing." Based on that, any student-loan debt with an interest rate above 7% should be paid off first, Krawcheck said.
It's also crucial to establish an emergency fund - a pot of cash equal to three to six months of expenses - before investing, because it's not a question of if you'll need the money, but when, and pulling it out of the market isn't favorable. The best place to keep this money is typically in a high-yield savings or money-market account, where it can remain safe and liquid, and earn a small amount of interest.
Whether you're juggling other financial priorities or not, contributing to a tax-advantaged workplace retirement plan is one of the best ways to get started investing, according to Ryan Cole, a certified financial planner and private wealth advisor at Citrine Capital. Your money is deferred before taxes and taken automatically from each paycheck, which makes it effortless and reduces your taxable income.
When your money grows tax-free, you have the potential to earn even more. Some companies will even match an employee's contribution up to a certain amount, so making it a priority to hit that limit is a good starting point to investing. But fees can eat into your returns, so be sure to check what your plan provider and the investment fund charge.
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