Introduction

The short answer to the question, “when should I start Investing” is ...right now. 

The first question you should ask is whether or not you are able to start. Do you have cash assets that you can afford to invest for the long-term? Have you paid off any high-interest debt and do you have an emergency fund? Is this money that is essential to the day-to-day operation of your household? 

While most investment portfolios are “liquid,” investment money should be looked at as untouchable for the longer term. It is important that when you invest, you can withstand the ups and downs that markets may bring so you can enjoy the value of long-term investment appreciation.

A Closer Look

If you're wondering whether now is a good time to invest, answer the following questions to see if you're in the right place to get started.

• Do you have enough money to cover essential expenses? While it may go without saying, if you are struggling to cover essential expenses, or think you may be in the near future, now might not be the best time to start investing. Again, investing will tie up your money for some time, so you should make sure your essential needs are covered before you begin new financial endeavors.
  
  

• Do you have an emergency fund? Before you start investing, make sure you have a savings fund ready to cover emergencies. While you'll be able to access the money you've invested in the stock market at any time, doing so at an inopportune time - when the market has gone down since your initial investment, for example - can cause you to miss out on potential future earnings or even lose money. Emergency funds can be a lifesaver if you need quick cash to cover expenses. It's recommended to save three to six months' salary in your emergency fund.
  
  

• Do you have debt? While the value of your investment could grow over time, it may not grow at a rate that outpaces the interest you are paying on your debt. For example, if your financial portfolio grows at a rate of 10% annually but you have a high balance on a credit card debt with a 15% annual percentage rate (APR), you'd be better off paying down your debt. From an investment perspective, in the short term, paying down your debt would actually save you money.

Investment Approach

The hard part is done. Next is the question of how. This should be determined by three components - time horizon, risk tolerance and investment approach. 

• Time Horizon. An investor’s time horizon is the period where one expects to hold an investment for a specific goal. Investments are generally broken down into two main categories: stocks (riskier) and bonds (less risky). The longer the time horizon, the more aggressive, or riskier portfolio, an investor can build. The shorter the time horizon, the more conservative, or less risky, the investor may want to adopt.
  
  

• Risk Tolerance. Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand in their financial planning. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to endure large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time. This is potentially, the biggest consideration an investor can have. Having your nest egg in a portfolio that you are uncomfortable with is a recipe for disaster. 
  
  

• Balanced approach. For most people, the balanced approach is the right one. If you’re a riverboat gambler, you would have mostly stocks in your portfolio - given that you have time on your side. A slight allocation of Fixed Income assets would round out your portfolio. If you are a nervous nelly, bonds will be the  largest asset class in your portfolio. A slight allocation to stocks will help you keep pace with growth but for the most part, your portfolio will take the “slow and steady” path.

   

The Power of Compound Returns

Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time, as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.

As the snowball becomes bigger, each turn of the snowball pics up even more snow. Understanding this effect leads one to quickly understand the importance of starting as soon as possible to invest for your future.