You know investing is the right way to build long-term wealth, but how much cash do you need to get started? Figuring this out can feel especially daunting if you’ve only recently begun to build up your savings. The right answer varies from person to person, but generally speaking, you should start investing once you have enough money to check a few important items off your financial to-do list. Here, we’ll dig into the details.
What you need to do before you start investing
There are three things we think you should do before you start depositing money into an investment account:
- Build a good emergency fund
- Pay down high-interest debt
- Get health and disability insurance
Once you’ve saved up enough to do those three things, you’re in a good position to start investing any extra cash you have left over after paying your regular living expenses.
Build a good emergency fund
An emergency fund is money you set aside for unexpected emergencies like sudden job loss, medical bills, home or car repairs – you name it. We’re big believers that a solid emergency fund is the cornerstone of any good financial plan. It can also give you some peace of mind.
As a rule of thumb, your emergency fund should contain between three and six months’ worth of living expenses. But your age, profession, total investable assets, and the degree to which you are (or could become) financially responsible for others should also play a role in determining how much is in your emergency fund. You can read more about how to build the emergency fund that’s right for you in our blog post on the subject.
Pay down high-interest debt
Even if you’re eager to start investing, you’re likely better off tackling your high-interest debt first. We consider high-interest debt to be any debt with an after-tax interest rate (taking into account any student loan interest that qualifies for a tax deduction) that’s higher than the rate of return you’re likely to get on your investment. In the case of a diversified portfolio of low-cost index funds, it’s reasonable to guess your long-term rate of return might be in the neighborhood of 5% annually. (Wealthfront’s recommended portfolios have outperformed that estimate by a lot, but as you know, past performance is no guarantee of future returns.) When you pay off debt, you’re effectively getting a guaranteed rate of return on your money: the interest you won’t have to pay in the future.
We don’t think you need to eliminate all of your low-interest debt before you start investing, but you should at least make sure you can cover the minimum payments on all of your debts before you start putting money in the market. For more help navigating the tradeoff between paying off debt and investing, check out this blog post.
Get health and disability insurance
If you’re currently employed, you probably receive health and disability insurance through your employer, so this should be easy. But if you don’t have this insurance, we think it’s wise to buy coverage before you start investing. The reason? Insurance is likely to be more valuable to you than an investment portfolio or even a cash reserve if you have a serious health problem. It’s good to be prepared, because this can happen at any age.
Can you start investing with $500?
The short answer is yes. Once you’ve tackled the items above and you’re ready to start investing, there’s no magic amount of cash you need to get started beyond the account minimum of any investing service you plan to use. At Wealthfront, you can get started with a diversified and automated portfolio of low-cost index funds with as little as $500. If you’re a new investor, we think you should get started as soon as you have $500 saved up beyond the goals outlined in this post.
Some people might feel tempted to save up a larger amount of money and invest it all at once, but there’s really no benefit to doing this. When it comes to investing, time is on your side – and the sooner you can get in the market, the better. More time in the market gives your returns more time to compound, and it also decreases your probability of loss. The key is to start investing early and keep putting money in, no matter what the market is doing. If you do this, you’ll be well on your way to building long-term wealth.
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The Wealthfront Team believes everyone deserves access to sophisticated financial advice. View all posts by The Wealthfront Team