Your Financial Plan: Is It Time to Start Investing Beyond Your 401(k)?
You may already be enrolled in a 401(k) plan through your job, but are you ready to adjust your financial plan and invest beyond your retirement account? The answer is different for everyone. Whether this is a good time to invest or not depends on your situation and where you are on your financial journey. Although the right time to invest is a personal decision, there are some general guidelines that can help you figure out if you're ready to start exploring the next steps.
You've Set a Goal for Investing
You should have a goal in mind for your investing, like preparing for retirement or earning income from dividends. It's also good to have an idea of the time frame in which you'd like to accomplish that goal — this might be five, 10, or 20 years. Depending on whether or not your goal is to invest for retirement may impact the type of investment account you choose.
You Have an Emergency Fund
Dealing with a layoff or unexpected medical bills can be tough, but it's more manageable when you have some money in the bank for emergencies. Investments aren't a good substitute for an emergency fund because it can take several days to withdraw money from them; in an emergency, you might need cash right away. Financial advisors typically recommend that you have enough to cover six months' expenses in an FDIC-insured savings account before you begin investing. Keep in mind that an early withdrawal from most retirement accounts will come with a significant fee or penalty.
You've Saved for a Major Purchase
If you want to make a one-time major purchase in the next couple of years, like buying a house, plan for that purchase before making additional investments for the future. The purpose of investing is to grow your money in the long term, so it doesn't make sense to open a new investment account now and then close it again in six months when you need cash for a major purchase. Once you have major purchases covered, then you're ready to consider investing.
You've Paid Off High-interest Debt
If you've ever had a balance on a credit card, you know that the amount you owe can snowball quickly as the interest adds up. While investments can go up in value too, they usually don't grow as fast as credit card interest accumulates. So if you invest while you still have high-interest debt, the growing debt could outweigh any gains in the value of your investment — leaving you worse off financially. Speaking with a financial advisor and establishing good credit habits by paying off balances each month can really help you in the long run, and keeping high-interest borrowing in check before you add investing to your financial plan. It's fine to start investing while you have a mortgage or a low-interest student loan, though.
You're Taking Full Advantage of Employer Matching
If your employer offers a 401(k) match, make sure you're investing in that plan so that you get the largest amount of matching funds possible. Employers usually match dollar for dollar up to a specific percentage. And, investing outside of your 401(k) doesn't come with matching contributions, so you want to get the maximum benefit from your plan before you pursue other options.
While the right time to invest is different for everyone, reaching some of these milestones is a good sign that you may be ready to invest. Wherever you are on your financial journey, meeting with a financial advisor can help you choose the next step. Schedule an appointment with a Key Investment Services Financial Advisor to see if investing is right for you.