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When is it Time to Move from Saving to Investing?

Retirement plans aside, not everybody is fortunate enough to begin investing in their twenties. Paying back credit card debt, establishing an emergency fund, and saving for home ownership all take priority. But when is it time to start?

Retirement plans aside, not everybody is fortunate enough to begin investing in their twenties. Paying back credit card debt, establishing an emergency fund, and saving for home ownership all take priority over building a stock portfolio.

But if you can start investing, you certainly should. So how do you know when to start? Here is run-down of what the financial priorities in your twenties should look like.

Start with Retirement

Even if you haven’t tackled all of your other financial priorities, think about saving for retirement right away either through your employer-sponsored retirement plan (401k) or an individual retirement account (IRA).

Even if it’s just $200 a year into an IRA, it’s important to get in the habit of setting aside part of your income for the distant future and you won’t have to pay federal income taxes on your contributions.

If you haven’t already, start saving for retirement now, and if you can, contribute the maximum up to IRA contribution limits.

Pay Off Credit Card Debt

Even in its best years, you won’t earn a return in the stock market that can surpass credit card interest rates. So tally up what you owe, take a deep breath, and knock out that ugly debt.

If you need a hand, our seven steps out of debt series can help.

Get an Emergency Fund

Unlike cash in short-term savings accounts, investments aren’t always liquid, meaning you might not be able to use the assets you have invested in emergencies like if you lose your job or face medical expenses.

Once your debts are paid off, concentrate on building an emergency fund equal to at least three months of your income. In time you will want to grow this to about six months, but three months is a good start.

With high interest rates and access to your money in about 2-3 business days, an online savings account like those from ING Direct is perfect for achieving this goal.

Keep Saving, Start Investing

Once you have an emergency fund established it’s time to start investing!

At first you won’t want to be quite as aggressive with how much you invest as you have been with paying off debt and saving.

Keep saving for upcoming expenses like your home, vacations, cars, even weddings.

Your investing priority should be retirement, and you’ll want to exhaust the ways you can save for retirement before turning to the general stock market.

IRS-set contribution limits in 2016 are $18,000 for 401(k)s and $5,500 for traditional IRAs.

If reach your retirement contribution maximums and are rearing to keep going, congratulations! Then it’s time to start considering buying some securities with an online brokerage.

What About Student Loans?

In most cases, it’s wise to start investing even if your student loans aren’t fully paid-off. Student loans generally have long terms but at fairly reasonable interest rates thanks to federal subsidies. With some aggressive investing you make more than you’re paying on student loans.

Published or updated on February 23, 2007

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. Tricia says:

    Im 27 and recently divorced. I am almost at my goal for my emergency funds. I have 6% going towards 401k with a 100% match. I would like to start investing a little money but I have no idea how to start, where to invest, or how
    Any advice for me?

  2. Nick says:

    Great advice! This is stuff I’ve read in books and scattered throughout articles over the past few years. It’s nice to see it put in one article in a brief, easy to read manner. Since I just paid of my college credit card and I’m maxing out the Roth, it’s time for me to start working on my savings cushion and 401k. Hopefully I can make it to buying stocks by the end of the year.

    • Jake says:

      Articles like this irritate me. It’s a regurgitation of a popular economic fallacy, based on an economic history that is very likely not to repeat for our generation.
      1.) Investing in the stock market, especially for beginners should NOT take precedence over paying down debt. That debt includes: revolving debt, mortgages, vehicles, and student loans. It’s a common perception that student loan debt is “cheap” debt. However true that may have been 10 years ago, it is absolutely NOT true anymore. I graduated with nearly 30k in student loan debt only 5 years ago. When I consolidated those subsidized and unsubsidized student loans the current rates were very similar to how they are now. But, my consolidated rate was still over 5%. Ten years ago that rate would have been 3% or under. Now, some people would say that 5% is cheap, and I would agree (in loan terms), but it is not cheap enough to justify the risk associated with trying to do better in the market. I, and most investors, would be happy with a guaranteed 5% return. The same goes for mortgages. Paying off debt is a GAURANTEED return on principle. Benjamin Franklin famously said, “A penny saved, is a penny earned.” True as this statement is, it isn’t complete. Benjamin didn’t account for taxes. In truth, a penny saved is about 1.3 pennies earned. So, depending on your tax bracket, to outweigh the 5% interest rates on 30K of debt, I would have to make 6.5% to break even on my interest payments. Now, I’ll concede that I’m approximating both sides of this equation, but any approximation error can be quickly outweighed by risk vs non-risk investments. Some people will say, “but student loan interest can be deducted.” That’s true, but usually not all of it, and only if you’re in a pretty low tax bracket. Anyone weighing these options in their 20’s is probably already in a tax bracket that wouldn’t permit interest deduction.
      2.) Maxing out your 401K/Roth is not necessarily the smartest thing to do. It has great tax benefits, but you pay a large price for those benefits. It is putting money in an extremely non-liquid asset. This money shouldn’t be touched until you retire. The tax and fee implications of removing the money early far outweigh any of the tax benefits. The government is essentially guaranteeing a withdrawal free investment until you reach the retirement age. My point is this; the cost of losing liquidity should be weighed into the cost of utilizing the 401K/Roth tax benefits. I agree that you should contribute at least to the limit of your employers contribution, but it is nonsense to blindly say that the tax benefit justifies maxing out your contribution.
      3.) Buying a house is NOT an investment. Interest rates may be low, but borrowing costs and home ownership are not. Buying a home was a life style choice before the bubble, and it should continue to be after; whether that life style choice is motivated by the urge to: begin a family, own something of your own, or break from the rental chains. Housing prices are still so high that they’re likely to go nowhere but down for the next decade. Just to break even with rent a house has to appreciate. Renting and buying is a choice between two evils. They both cost money, but it is my opinion that buying will cost a lot more for at least the next decade. Save now and pay cash when the timing is right. Home prices will not jump back to their 2005 highs any time soon, so don’t feel rushed. It is very likely that prices will continue to fall, so you’ll probably end up getting a lot more for less. I’ll reiterate, DO NOT FEEL RUSHED. Buying now is throwing dumb money in with the bad.
      4.) The stock market is a lottery machine. Regular people do not have the necessary information to truly succeed in active investing. The line between investment and speculation is so blurred that it has become nearly impossible to know when you’re engaged in one or the other. I learned this one the hard way. There is a phase lag between the information we receive to make intelligent decisions, and when we need the information. Particularly in the stock market, he who knows first, wins. You will not know first, second, third, ….., or at any point which is still helpful. So, what can you do? Your best option is to avoid things that you do not fully understand. And, quite honestly, it is becoming more and more evident that even the people at the top lack such an understanding even as they create the rules. I’m not saying that you should boycott stock exchange markets; I’m just saying that you should focus on capital preservation rather than large gains. Slow and steady wins the race. Buy practical, something that produces income, and sit on it until an opportunity comes along that you can personally see through to success.
      5.) Cash is not king. Cash, like most “investments” today are valued by perception. A perception that they are of stable value, a perception that they will always go up, a perception that things will always be better. Cash is no exception. The dollar is only worth what people are willing to pay for it.
      a. If you’re starving how much do you think you’d pay for some bread?
      b. Now, what if everyone is starving?
      c. Which would have more value, a loaf of bread or a stack of money?
      If you don’t see it, here is the point. Money is worth nothing if people do not value it. The above example is obviously a little extreme, I’m not implying that this is a scenario we’re likely to encounter, I’m just trying to make the point that at the end of the day money is just paper and it’s only REAL value is what people will trade for it.
      The dollar has been perceived as a solid investment for decades. That isn’t to say it will always be.
      6.) Money is freedom. Living in debt, or trapping your money in non-liquid assets forces you to live a productive, possibly miserable, life. Why limit your ability to adjust your life and lifestyle if your current situation becomes undesirable? What does this imply? Simple, buy when you can afford to buy and do everything you can to limit your debt. In my opinion, this should include every first home purchase.

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