Can I Afford to Start Investing? 6 Steps to Find Out

Can you afford to invest? Great question. The idea of investing to build your wealth is attractive, but some people hesitate to begin investing because they aren’t sure whether they can afford it or whether it’s the right time to start. Discover the steps you need to take to learn if investing is right for you:

1. Determine your goals

The adage “If you don’t know where you’re going, any path will take you there” is true when it comes to investing. Think about what matters to you: Creating an emergency fund? Buying a home? Furthering your education? Or saving now for a comfortable retirement?

It’s important to prioritize your goals to create a foundation for your investment strategy. If you’re not sure where to start, check out essential financial steps to take at different stages of your life.

One place to begin is with retirement. It’s the simplest and most affordable way to begin investing. People often think of investments as stocks, and bonds, but it can be as simple as investing in yourself and your future. Kickstarting your savings now will help you build a nest egg that is large enough to pay for your retirement. Plus, the earlier you invest, the more you can earn due to compound interest. To get started, explore (and understand) four key types of retirement accounts.

• Over 72.21 million Americans participate in 401(k) plans, making it among the most popular retirement plans. 401(k) plans are employer-sponsored retirement savings plans that allow employees to save and invest a portion of their paycheck before taxes are taken out.

• IRAs (Individual Retirement Accounts) offer several tax benefits, including earnings that grow tax-free. Just about anyone can open an IRA including small business owners and self-employed individuals. Discover the unique advantages of the four basic kinds of IRAs. 

If you begin investing in your retirement and can afford to do more, consider other goals and the types of investments that could support them. For example, is sustainable investing right for you? Sustainable and responsible investing means investing in companies that promote positive social or environmental outcomes. It’s an approach that allows you to select investments that reflect your values from green energy to inclusive companies.

2. Do your research. (It’s worth it)

If you’re new to investing, you don’t need to become a savvy investor overnight. But it’s a smart idea to familiarize yourself with basic investment terms. Understanding key terms can help you make more informed investing decisions even if you’re working with a financial advisor. For example:

• Shares/Stocks. Shares, also known as stocks or equities, represent ownership in a company. When investors buy shares, they become shareholders and have the potential to benefit from the company’s profits and growth. (They also come with risks associated with market volatility).

• Diversification. Diversification involves spreading investments across different asset classes, industries, and regions to reduce risk. By diversifying, investors can potentially minimize the impact of a single investment’s poor performance on their overall portfolio.

• Time Horizon. Time horizon refers to the expected length of time before needing the funds for a specific goal. It can be short-term (1-3 years), medium-term (3-10 years), or long-term (more than 10 years). The time horizon influences the choice of investments and the level of risk you may be willing to take.

3. Understand your risk tolerance and capacity.

If you’re questioning whether or not you can afford to invest, you may have a low risk capacity or tolerance. Understanding your risk levels will help you determine how much you’re comfortable investing (and losing) and the amount you can afford can potentially influence it as well.

The more risk you're willing to tolerate, the more investment opportunities you can consider. Higher-risk investments generally offer the possibility of higher returns (but can also cause significant losses due to market volatility).

Risk tolerance vs. risk capacity: Risk tolerance isn't the same thing as risk capacity. Capacity refers to how much risk you can manage, financially. Are your funds limited or flush? Is your timeframe for your investment short or long? If you don't have much money to invest or you'll need the funds soon, your capacity is smaller than if you have more to invest or won't need the funds for a long time.

Use our risk self-assessment PDF to determine your level of acceptable risk.

5. Determine your investment budget.

Once you’ve laid the foundation and understand more about what investing is and your goals for investing, you can set an investing budget. In the beginning, keep it as simple as possible. It’s important to think about what you can reasonably afford.

• Check your current financial health. This will help determine what you can afford. Here are the key aspects to evaluate: Income vs. Expenses, debt you currently have, and if you have an emergency fund.

• Use an app. Many well-known names in investments offer apps to manage investments. Some are focused on educating beginners on how to start investing on smaller budgets. If your investing budget is smaller, it is a simple way to learn the basics.

• Think beyond traditional investments. You can make the most of your investment budget and savings by using alternative options like CDs (Certificates of Deposit) or money market accounts to achieve more secure returns without the concern of roller coaster markets.

• Check your progress. If you are investing traditionally, your investments shouldn’t be “set it and forget it.” Check your progress and compare them to both market conditions and any changes in your goals or family situation.

6. Collaborate with a financial advisor.

Investing can involve a confusing array of products and strategies. A financial advisor can help cut through the clutter and provide an experienced perspective on how to invest based on your goals, risk tolerance, and how much money you have available to invest.

Beyond investments, an advisor can help you with budgeting, retirement planning, college planning, tax management, long-term care planning, and more. Some advisors require certain dollar amounts of investable assets to begin working, so always ask about fees and dollar amounts, among other questions to find the right advisor.

If you think you may need investment guidance, but are concerned about the cost, a Robo-advisor might be a smart alternative for you. Robo-advisors use computer software and algorithms to recommend investments and trades without human involvement. Typically, they are faster and more affordable than human financial advisors. Explore the pros and cons of using a robo-advisor to help guide your investments.

How much you can afford to invest really boils down to your disposable income. You need to make sure that you’re not struggling with debt or have too many current expenses so you don’t overextend yourself. The good news is that you can start small and take advantage of a 401(k) or IRA or use investment apps that don’t require high minimum investments or large fees.

Happy investing.