Why Not to Invest
By now you know how passionate I am about investing as the most important and accessible practice for building wealth. It’s something not enough of us take advantage of!
However… you might be surprised to hear that I don’t think everyone should invest. In fact, there are specific circumstances in which I would argue it’s better to put your money elsewhere.
Here are the reasons not to invest.
1. You’re Investing For the (Very) Short Term
Considering the low interest on regular savings accounts, it can be tempting to try to get a higher return rate by putting that money in the stock market. But it’s not a good idea for you to put your money in an investment account, if you know you’re going to need that money soon.
Investing allows you to grow your money over time, but the value of your stocks will not only/ always move in an upward direction. You might check your balance the month after you buy some stocks and realize you have less than when you started.
Look at this 5 day graph of the S&P 500 — an index fund I discussed last week. It’s decreased in worth by 75.84 points in a few days, and we can’t be sure when it will start going up again.
Meanwhile, this 5 year graph of the S&P is much more positive, but even here we see that within the overall growth, there were ups and downs. For example, there’s a very noticeable dip near the end of 2018/ beginning of 2019.
Investing is fantastic for your long-term plans and for making money years in the future. But for shorter term savings, it’s much safer to allocate your money to a savings account or some type of guaranteed term deposit, like a GIC.
Especially as a new investor, you might be a bit nervous, and it’s easy to get discouraged early on if your stocks are suddenly on a downward trend. But having that long-term vision means that the downs are no biggie because you don’t need the money now anyway.
2. You Don’t Have Any / Enough Emergency Savings
A major milestone on the path to becoming financially secure is having a safety net for unexpected expenses. We should all be aiming to have savings of three to six months of our basic expenses — enough for rent, bills, food etc.
Your emergency savings should have a bit of distance from the account you regularly use, so that you’re not tempted to withdraw the money for non-emergencies, like a vacation or Christmas gifts.
To keep your emergency savings out of arms reach, you can have this account at a different bank than where you have your chequing account. This is what I do because it puts a barrier in the way of the temptation to transfer money between accounts.
At the same time, you don’t want your emergency savings to be so out of reach that you’d have trouble getting hold of the money in a real emergency. This is why having this money in the stock market is not a good idea. The money’s not as easy to withdraw on short notice.
More importantly, if you keep emergency money in the stock market, you can’t be sure of how much you have on any given day because of the fluctuations.
What if an emergency happens when your stocks have lost value, and the $2000 you thought you had is actually only $1700? If you truly need the money at that point, you’re losing out on $300.
Of course, any loss of value is not a permanent situation, but you can’t ride out the wave if you have to make an unexpected withdrawal.
It’s very risky to start investing before you have those three to six months of savings built up. Building savings does take time, but it’s a buffer you need in place.
And one last thing: if you ever have to dip into your emergency savings, it’s okay to pause deposits into your investment account until you refill your savings!
Having all your bases covered should always be the first priority. The nice thing about investing is that the money continues to work for you, even if you can’t add to it.
3. You’re Paying Off Debt
Tackling debt requires a lot of determination, as it doesn’t always feel like you’re making progress. But as billionaire Mark Cuban says, paying off your debt is a better investment than the stock market.
Now, some people do invest in the stock market while they’re paying off personal debt. But mathematically, this is often a slower way to build wealth, and here’s why.
Let’s say you have a credit card payment at a 20% interest rate. Instead of trying to pay off your balance in full, you decide to take some money to buy index funds that you’re expecting to bring a 10% return.
Well, in this situation, you’re losing money. The interest you’re making from investing is not cancelling out the interest rate on your credit card debt.
If you owe 20% and earn 10%, you’re still at negative 10%. You can’t really out-earn such high negative interest. Whereas if you focused on paying off your debt, and then started investing, you’d have a quicker path to making positive 10%.
Focusing on your debt means not paying just the minimum, but putting as much money as possible towards paying off your balance in full.
The thing is, compound interest is great when it comes to investing, but it can be a nightmare when it accumulates on your debt — causing you to pay way more for your purchase than it was worth.
4. You Don’t Understand Investing
This last point is one that I can’t state enough. It’s so important to have a basic understanding of how investing works and what you’re actually doing with your money before you start.
Lucky for you, I have three amazing resources for learning about investing, and I also give an overview of the best investing strategy, with lots of informative links built in.
Keep checking back with the blog, as I will continue to write about investing and long-term money goals, so that we can all have a wealthier future!