Am I financially ready to start investing?

Investing can be a great way to put your hard-earned money to work for you. Getting started as early as possible gives your investments the longest time horizon to potentially grow.

But how do you know if you’re financially ready to start investing? Consider this hierarchy: 

Make sure you have a clear idea of your budget–cash inflows (paychecks) and necessary outflows (rent, student loan payments, utilities, food, etc.)–so you know how much is regularly left over to potentially contribute to your investing account. If you don’t have a budget in place, these five steps can help you get started.

Build up your emergency savings before investing. Having a liquid savings account means you’ll be less likely to turn to expensive borrowing options, like credit cards, when you’re in a pinch. Aim to set aside at least three to six months of living expenses in a high-yield savings or money market account that’s Federal Deposit Insurance Corporation (FDIC) insured.

If you’re carrying a balance on one or more credit cards, make a plan to pay it off as soon as possible to avoid snowballing interest costs. You can do this by making more than the minimum monthly payment, looking into a debt consolidation loan to combine multiple balances at a lower interest rate, or applying for a balance transfer credit card that offers a temporary 0% annual percentage rate (APR).

If you have access to an employer-sponsored retirement account at work, it’s a simple and effective way to start investing. Employer-sponsored retirement accounts like 401(k)s and 403(b)s have tax benefits that aren’t offered in a taxable brokerage account as well as higher savings limits than individual retirement accounts (IRAs).

A good rule of thumb is to contribute at least enough to get the maximum employer match, if your employer offers one. For example, employers may match a percentage of your contributions or up to a percentage of your annual salary, which is more money you can use to invest in mutual funds and ETFs.  Some plans may offer certain stocks you can invest in. Many of these plans allow you to automate your contributions each pay period, and some allow you to escalate your contributions annually until they reach a goal that you set.

At this point you should have a solid financial foundation and you should consider your investing goals: What do you want to use the money for and when do you need it?

Setting aside even small amounts can make an impact over time, thanks to the power of compound interest. That means the sooner you can start investing for things like a dream vacation or a new home, the better.

Even if you don’t know yet exactly what you’ll use your funds for or when (maybe you want to buy a house, throw a wedding, or start a business someday), it’s worth investing sooner than later.

Investing can be a great way to help build wealth, but it does come with risks and it’s important to consider how much risk you’re willing to take. The relationship between risk and reward in investing is generally such that the more risk you take, the higher your potential return, but also the greater the potential loss. 

To invest effectively, you should understand your risk tolerance. If you invest too aggressively and your investments lose value, it may prompt you to change or abandon your strategy before your investments can recover. 

Your risk tolerance is influenced by your experience in investing, your age, and your time horizon for a specific goal, so expect it to shift throughout your life. E*TRADE from Morgan Stanley offers a tool that can help you visualize and better understand your own risk tolerance.

No! You don’t need a lot of money to start investing. What you do need is a stable financial foundation so that you’re not risking money for more urgent needs. Check out ways to get started that will fit in your budget.