Step 53: To invest or not to invest

Step 53 of the 100 Steps mission to financial independence: To invest or not to invest?
Step 53 of the 100 Steps mission: To invest or not to invest?

The big question is of course whether you should or shouldn’t start investing. Ask anybody and you are likely to get very different answers, some saying they can recommend putting in some money monthly, others saying only the really wealthy or dumb invest in the market, whilst still others see it as their main way to (early) retirement.

The truth is, whether or not to invest depends entirely on you, your personal (and financial) situation, and the reasons you might want to invest in the first place. In this step I’ll try to give you some pointers to think about to help you determine whether or not you should invest, but the ultimate decision is yours and you have to feel comfortable and happy with that decision.

My boyfriend at the time (he’s my husband now), suggested we’d start investing in 2009 when the market was at a low. Now I wish we had, as we would have been able to buy lots of really cheap shares, but at the time I didn’t know anything about money and didn’t feel comfortable putting money into something that I didn’t understand. Of course I regret not having bought those cheap shares now, but I don’t regret not putting in money without knowing what I was doing and whether I really wanted to invest.

To invest or not?

Let look at some important questions that can help you determine whether or not to start your luck on the stock market:

  • Do you have high-interest debts? There is no consensus about whether or not you should pay off all your debts first before investing or not, but if the debts carry a high interest rate it might be wise to pay these off first.
  • Have you got money available to start investing? Traditionally you needed a big amount of money to enter the market, although nowadays with index and ETF investing it is possible to invest with relatively low monthly amounts, sometimes as low as $50-100 depending on the brokerage firm. Alternatively you can put in a lump sum of around $10.000 at once and just leave it there without any monthly contributions. Either way, you need to have that money available to put in.
  • Can you and your family actually miss the money? Investing often means that you tie away your money for long periods of time, especially in the case of index / ETF investing, when you are talking about years and rely on time + compounding interest doing its magic. Have you got access to an emergency fund or other types of cash ( without having to build up any more debt by taking out (more) loans!) in case of an emergency?
  • How much risk can you handle? If it scares the hell out of you that you might lose a lot of money on the market, then investing might not be a good idea, or maybe you just want to go for very safe bonds. Similarly if you love a bit of a thrill, you might end up taking too much risk and thereby losing significant amounts of money. Would you be able to handle that?
  • Why do you want to invest? What would you want to use money for? Typically the best results one can get on the stock market is over a prolonged period of time, especially when buying ETF or index funds, using a buy and hold strategy. If you are looking to make a lot of money or in a short amount of time, you might need to think of other options to make money. Or risk losing a great deal by handpicking your own stocks.
  • Lastly but not unimportantly: are you willing to read or have you read enough about investing? If you don’t know too much about investing, don’t jump in until you’ve learned more. Pick up some books from the local library, search the net, ask a trusted and experienced acquaintance for tips and most of all: make sure you know what you’re talking about, how it all works and what the fine print and conditions of the various brokers are. (Hint: my steps are an introduction and definitely not enough for you to say you know what investing is all about!).

The above are just some factors to think about, but truth be told, investing is not something you should start doing overnight. It requires a fair bit of planning especially in order to make sure you can deal with the financial and emotional risks, as well as figuring out where you’ll free up the money in your budget.

Now that we’ve established the precautions and questions you should ask yourself, let’s revisit some of the points that makes investing worthwhile to many.

  • Investing is an alternative to saving, you put money aside and if you are lucky you build up a nice amount of money. Instead of it being in a savings account, the money is put in stocks and bonds.
  • Over long periods of time, the stock market goes up. So yes, there is the occasional crash when stocks go down by 50% or even more and people lose all of their money, but if you sit it out and just wait for the market to recover (if you have the time), your shares will in theory end back at to their original value and beyond.
  • On average the markets go up by somewhere between 7-10% yearly. That is more than most inflation rates, meaning your money grows in these scenarios, whereas if you left it tucked away under your mattress, it would lose value due to inflation.
  • The market average is also normally higher than interest rates, so if you left the money in a savings account it would grow less than if you invested it in low-cost index funds to get those average returns over long periods of time.
  • Many people like to track their shares and see how they are doing, it is a little bit like going to the horse races and putting your money on a horse. The most fun part is watching the race and seeing how you perform over time.

All of the above is no guarantee for anybody being able to make money on the market. For all we know, the market might crash again completely tomorrow and not recover for another 40 years… That would indeed be all your money gone. The above just states what has happened in the past and on average over long periods of time.

Step 53 – To invest or not to invest – in detail:

  • Grab your pen, notebook or digital file.
  • Go through the list of questions above and answer them one by one, write down as much detail as you want.
  • Go through the reasons for investing and indicate one by one whether these apply to you or not.
  • Are there any other questions or reasons you can think of?

If after answering these points you still feel you are now ready to start investing, there are two things to do first before you start:

  • Read up about investing.
  • Discuss your plans with your partner.

Once that is done and you are still happy to start this new adventure, then you might well be ready for it. Good luck and as always: enjoy!

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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