When shouldn’t I invest
Investing can help make the most of your money, but it might not be the right choice for everyone, right now.
Whether or not to invest will depend on your financial situation and your goals – so the money you do (or don’t!) have and what you’d like to do with it.
Here are some situations when it’s best NOT to invest.
1. No emergency savings
In an ideal world, everyone should have some savings stashed away. If the boiler blows up, the car breaks down, or the washing machine grinds to a halt, that money will come in mighty handy.
Experts recommend setting aside three to six months’ of living expenses. This should cover your mortgage or rent, household bills, food, transport and other essentials. If you get blindsided by illness, divorce or unemployment, those savings will prove a real lifeline.
Emergency savings need to be easily accessible, in case you need money in a hurry. So before starting to invest, build up enough money in a savings account.
Otherwise, you could be forced to sell investments when the market is low, rather than being able to wait until the market comes back up again.
2. Expensive debts
Investing on one side when you have debts on the other can be an expensive mistake.
Typically, it’s hard to earn higher returns on savings than the interest paid on debts. Unsecured debts like credit cards, store cards and overdrafts can charge interest as high as 30% a year. That’s far more than you are likely to earn when investing.
So check the annual percentage rate (APR) on any borrowing, and consider clearing debts with the highest rates first. Just make sure you don’t face any penalty charges when paying off debts earlier than expected.
The decision can be less clear cut with cheaper debts. When mortgage rates are so low, more adventurous investors might prefer to venture onto the stock market in the hope of higher returns, instead of clearing extra chunks of their mortgage.
However, while investing can potentially earn higher returns, there’s no guarantee. You risk losing money, whereas if you pay off part of your mortgage you will definitely pay less in interest.
The exception is investing in a pension, especially if you can contribute to a workplace pension, and get a top up from free money as tax relief and contributions from your employer.
The younger you start saving for retirement, the better, as the money rolls up over the decades. Investing in a pension might still make sense, even if you haven’t bought and paid for a property and shed any other debts.
3. Short term goals
In general, investing is only suitable if you can tie your money up for at least five to 10 years and ideally longer. So if you stray into your overdraft or dip into your savings every month, it’s worth waiting until you have freed up some extra money to invest.
Also, if you know you’ll need money in a few years – as a deposit on a home, to pay for a wedding or to cover school fees, for example – it’s not a great idea to plunge everything into investments.
The issue is that while the stock market tends to go upwards over the long term, it doesn’t move in a straight line. Instead, investments can lurch wildly up and down.
If the market plummets, it doesn’t matter so much if you can afford to leave your money invested hoping for the value to rise in future.
However, it could be bad news if you face a financial deadline, and are forced to sell when markets have dipped. If your house deposit halves just before exchange of contracts, you might struggle to buy your dream home. Investing money you can leave untouched for at least five years will help ride out inevitable peaks and troughs in the stock market.
Faith Archer is an award-winning personal finance journalist and also a money blogger at Much More With Less