When To Start Investing?

I think that every household should have 2-3 months in expenses covered before they even begin thinking about investing. After all, when you buy a stock, you should be intending to hold it for the long-term. However, if you are short on cash to meet everyday expenses, you might have to sell some of your stock to meet your everyday needs. This is not a good situation.

Generally speaking, the odds are decent that the time you need to have money could also be a time when your stocks aren't performing well. Think about it--stocks go down when there is a recession because companies aren't making as much money. Do you think that you're more likely to need money during a recession or during times of economic expansion? Most likely, during a recession. If you have to sell your stocks at this time, you'll most likely have to take a 10-30% loss, and this is not a good way to live.

A much better approach would be to make sure that you have enough liquidity on hand. Lehman Brothers, the legendary Wall Street firm, was worth billions upon billions of dollars, but they went bankrupt in the fall of 2008 because they had tied up too much of their money and didn't have enough cash to meet everyday expenses. And the same could happen to you.

Get in the habit of regularly setting aside $50-$100 a month for an emergency fund, and quickly replenish any funds that you have to take out to meet a short-term need. If you get in the habit of regularly putting aside money, you will not have to jeopardize your long-term fiscal health. Having to put $1000s of dollars on your credit card is the surest way to shoot yourself in the foot, and you will end up paying 10%+ on your debt. You can't get ahead making these kinds of decisions. Focus on having enough cash on hand, even if that means scaling back your lifestyle, and you'll be surprised by how many of your problems will disappear.