Should I Build Out My Emergency Fund or Invest First?
Handling our finances is no easy feat. Sometimes we can become overwhelmed with the amount of information out there and the lack of accountability to know exactly what we need to do. Since the onset of the global pandemic (Covid-19), I've noticed a surge of millennials and Gen Z rushing to start investing their money into financial markets like stocks and cryptocurrency.
On the one hand, I think it's great that younger generations are starting to realize the importance of having their money beat the enemy which is inflation, and have their cash appreciate over time. On the other hand, I see many people rushing into markets that they don't understand and are easily influenced by others who don't know what they are getting themselves into. Getting rich quickly hardly ever happens, yet people will do anything and risk anything to give it a shot.
As an investor in the stock market for over five years now and seeing consistent positive returns year after year with an average 36% ROI, I've made it my life's mission to help and empower women to live more meaningful and more abundant lives. Through them, I do this by learning how to have their money work for them and gain the confidence to make their own independent financial decisions.
You would not be wrong if you thought that a big question I always get asked as a wealth coach is - how do I know whether to save first or start investing? So, here are three main things you should consider before investing in any financial market.
Have a Solid Emergency Fund Built First
So, the first thing you should probably be asking yourself is - do I have an emergency fund? For the most part, the stock market has outperformed itself over the past 100 years, amidst all the volatile highs and lows. There's not much to fear, but when we don't prepare for what we're getting ourselves into and start trading things we don't understand, it is easy to get burnt. Like myself, even the best investor knows that anything can happen to my stocks, and I could lose it all. If that were to happen, I still want to ensure I have money in the bank.
You see, your emergency savings is not your retirement fund. These are two different savings goals that require two very different strategies. Most finance gurus and experts will tell you that you should have at least 3-6 months of your expenses covered in an emergency fund. This is a great place to start, but depending on your financial situation and any assets you may have - you may want to consider building it up even more. You can check out my article on "How Much Your Emergency Savings Should Be" here.
Just think about it like if you were out of a job. If you lost your job or weren't making money for the next six months, how much money would you want to have in your savings to keep you afloat? These are some of the types of questions you should be asking yourself. You have to assess your financial situation because nobody's case is the same. Your friend may still be living with her parents, and she doesn't have to worry about rent and groceries and all of the other stuff that comes with adulting. You may have assets to maintain like a house, things that can break down like a car, and hospital visits that can be a total hole in your pocket (sorry, my U.S. folks). So considering your lifestyle needs is critical, instead of looking at other people's savings goals and then basing yours based on theirs.
Even if you already have a solid emergency savings fund, you're maybe investing or working towards other goals, so you want to make sure you're continuously adding to your emergency fund. As your income tends to increase, expenses tend to rise - this is called lifestyle creep - and this is an ample reason why some people are never able to get themselves out of that paycheck to paycheck pattern. It's essential to not forget about updating your emergency fund size and topping it up to ensure it is still meeting your 3-6 months minimum expenses required.
Technically, You Shouldn't Owe Anyone a Thing.
Check your debts first. If you have high-interest debt like credit card debt, it most likely won't make sense to start investing. Why? A big reason for this is that typically the average investor investing their money in a growth ETF fund tracking the S&P 500 (I know that was a mouthful to understand) sees on average 7-10% returns on their investments each year. The interest rates on credit cards tend to range anywhere from 15% to 25%. If you see a 7-10% ROI every year, but then you also have to pay off a whole bunch of credit cards with interest rates of around 15-25%, your high-interest debt is canceling out whatever returns you would’ve otherwise seen in your investments.
Therefore, investing with high-interest debt defeats the purpose, so doing your due diligence to crunch the numbers is sure to be worth it in the long run. Even if you don't have high-interest debts, if you have too many other types of low-interest debt combined, they can still all add up to have interest rates that would cancel your investment returns. Student loans and car loans tend to be around 3-8% interest, and so if you have one or more of these, you can see how the numbers can quickly add up.
Your focus will be on directing all your time and energy to pay off these debts as fast as possible. I usually tell people to focus on paying off credit card debt first, especially if they have much of it. An exception to the rule would be a mortgage, as this is an investment vehicle already in respect of it being an asset that appreciates over time. Any interests you have working against you, you want to eliminate that ideally before investing in the stock market. I know many people will still want to cheat their way around this, so if you are someone with just a car loan or only a student loan, I usually allow my clients to get away with it*.
Get Your Mind Out of the Gutter
If the other two points weren't enough to persuade you into not getting into the stock market, perhaps this final point will significantly if you're investing in the stock market because the stock market is what I like to call the biggest casino on planet earth. The stock and crypto market is literally where everyone goes to gamble and get rich quickly. Even though that shouldn't be your reason for investing, we can see with the past year or so a significant increase in people entering financial markets at rapid rates. The stock market is not for the mentally weak - and if you find out you are, most likely you've made significant losses in the game already.
This is why my third and final thing to consider before investing in the stock market is to know if you are mentally equipped for the psychological triggers and market manipulations. Although performing well over long periods, the stock market has been well known for its unprecedentedly shocking dips and volatility. You want to be in a mental and emotional state where you can remain rational and not let your emotions get the best of you if you see volatility in your portfolios (your money going up and down). Most people who lose their money in the stock market tend to sell their stocks too early because they buy into the overwhelming panic—not realizing that the market is sure to go back up again and peak higher than where it peaked before.
As I'm writing this blog article, my stock portfolio is down 10%, and because I have lots of money in my account, this looks like thousands of dollars at the moment. Yikes! If you're going in to check your figures every day and panic at this, you're probably not ready to invest. I advise my clients if they're not in the place to start trading as yet, to set up a practice trading account with their trusted financial institution or private brokerage platform. This is probably one of the most brilliant things to do if you're not confident as yet or unsure of investing real money into a financial market and testing out your mental game before making that lifetime commitment. You can open up an account right now and pretend you have about $100,000, start buying different types of stocks and see how they perform over an 'X’ amount of time.
Don’t Invest Money You’re Not Willing to Lose.
Another thing to consider regarding your money mindset and investing is that are you terrified of losing money, even just for short periods? Some people are frightened of investing in themselves because they fear that money is already so hard to come by, so they distrust that money will find its way back. If you're someone who's scared to part with money because you have this fear that what you put out isn't going to come back to you, it likely means you have adopted a scarcity/fear complex built on a range of traumatic emotions like stress, fear, doubt, and anxiety. You're going to be one of those people who will just be pulling out of the market at any given time and losing more money than if you had the patience to stick things out.
Understanding the flow of money and being one with the energetics of it is a practice and understanding that takes time to build and witness along your financial journey. The market has consistently outperformed itself, so just like life, there will be many lows and highs. With every high, you got to prepare yourself for a low, whether it is by investing in the stock market or whether this is trying to build up solid emergency savings. You can be coasting well right now, and then six months from now, you lose your job, and now you are back in a state of financial overwhelm and panic. This is when people freak out (always in our lows), and this is why you don't wait to get your finances in order when you hit rock bottom. You decide to hire a wealth coach or see a financial advisor when you're doing pretty well. You have money coming in because there's going to be a point in time somewhere down the road when shit may hit the fan, and if you don't know what to do when shit hits the fan (which is what I prepare you for) then you're just going to end up right back in the same broke, scarcity filled, overwhelming place.
Over time, you want to get to a place in your finances where you feel steady and feel confident in your finances and make your own financial decisions. This is the person who is prepared and confident in whatever may come their way. I always recommend my clients do things like journaling, meditating, and Emotional Freedom Technique tapping, to regularly find emotional stability in their life and finances. When you get to a place where you can regulate your emotions on a day-to-day basis, the better your relationship money can be. We have so many subconscious limiting beliefs, thoughts, and feelings that are driving the actions of our day - even life -, and if you're not at a place you're able to tap into your highest self and address these issues on a subconscious level, investing and managing your finances within any financial market may be a dangerous thing to do. It's going to come with more uncertainty than you would need on your way to becoming financially secure.
The last point is that if you are someone who tends to dip in and out of your savings, this can be a great indicator that you need to find a steady relationship with your ability to save first. I know many women that come to me saying that they try to build out their savings, and every time they build it up, something comes up and depletes it again. You don't want to be the person who starts investing, and then something happens, and you start going straight into your investments and pulling out to fund your emergencies.
This is why we have an emergency fund as a protective layer to prevent you from going into your assets. When you invest in the stock market, you are most likely like most people who are investing for their retirement. You will never reach that million-dollar retirement, if you're constantly going into your investments to pull money out for emergencies.
Whatever you decide, I’m just proud you’re doing something
With all that being said, it boils down to these three main points to determine if you are ready to start investing. Make sure you have 3-6 months’ worth of emergency savings (if not more), pay off any high-interest debt, and make sure you have a solid money mindset before getting into the investment game. Although the best time to start investing was yesterday - there is no rush to get into a dangerous game built on a rocky foundation. Things can stumble and fall, and you want to make sure you have a solid backup plan and strategy before getting in. At least this way, any fall won't be as disastrous as the one who didn't prepare for it. Set yourself up for success, and join the fast money game when all your ducks are in a row.
*I actually started investing in University before understanding the concept of interest rates beating out my returns. However, I see outstanding returns, allowing me to get better results even if I have high-interest debt working against me. Also, my student loan interest was only about 4% at the time, and I've worked on paying that and my other debts off over the years as I was investing.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
Want to learn more about how you can start saving and being more mindful about your money decisions? Download the best-selling e-book on Mastering Your Money Mindset: A 3 Step Guide on Attracting Abundance , or you can also find out more about the author and holistic wealth coach at www.morganblackman.com