This post is sponsored by Lexington Law.
Investing is one of those adult things you figure you should be doing, but is it always the savviest next step? Surprisingly, sometimes the answer is no. There are many situations when investing isn’t the smartest financial move you can make.
Moving towards your financial goals involves can sometimes feel like taking two steps back. It’s an individual journey for each of us because each situation is unique. Self-awareness is key to reaching your financial goals and sometimes that means recognizing when the step you want to take isn’t the wisest decision for you now.
Here are 7 times when investing isn’t the smartest financial move:
1. You have high interest debt.
The “what do I prioritize first” question is a big one that comes up frequently! Only 20% of Americans don’t have any consumer credit card debt. These debts often have high interest rates that can make you feel like you aren’t making any progress on your repayment.
You might be looking forward financially wondering what you should do next. You’ve heard that you should have an emergency fund, and it’s probably a good idea to invest, and of course, save for retirement already. If you have consumer debt, chances are your budget is already stretched a little thin. So how do you make the right decision?
If you have loans with an interest rate over 7%, prioritize those and your savings. Yes, it would be beneficial if you could start investing now, however, 7% is the average long-term market growth rate. If your debt is earning interest over that mark, you aren’t going to be better off in the long run. The smartest move would be to pay off the debt as quickly as possible, calculate your necessary emergency savings, and then begin investing.
2. You have unfair negative items or errors on your credit report and/or a low credit score.
Does your credit score directly impact your investments? No. That said, errors on your credit report and unfair negative items can have a direct impact on your future financial situation. This is part of the necessary financial housekeeping to do before you intensify your finances any further.
These things happen, even to the most financially savvy people among us. It can be unintentional like a small unpaid health bill that finally accrued enough interest to ding your credit score. Or your identity could be stolen resulting in erroneous lines of credit.
I am always an advocate for using an identity and credit monitoring service like Lex OnTrack. A tool like this includes your monthly FICO score and analysis (alerting you quickly if anything is afoot), $1,000,000 in identity insurance, credit repair as needed, and additional personal finance tools to keep you on track. This is a worthwhile monthly expense in my book and something I highly suggest for you and your family. Click here to learn more and sign up.
3. You don’t have a lot of time but expect a big return.
If you’re looking at investing as a get-rich-quick scheme, it’s not for you. It’s not meant for you to make a massive profit with a few trades. Before you begin investing, you need to get your mindset in the right place.
If you need to make more money in the short term, it’s better for you to start a side hustle, negotiate a raise, or reduce your expenses.
4. You see a house as an “investment.”
This is a very hot topic in the personal finance world. While property might seem like a good path to go down, the house you buy for yourself to live in is not guaranteed to make you money. And for the most part, you’re usually better off investing the money you would have put towards a house if your end goal is to see a return.
That said, owning rental properties and leasing them to tenants or even as an Airbnb or similar can be a way to make side income in the right circumstances. There are still a lot of things to consider here such as property taxes and your mortgage, not to mention start up costs and filling the role of landlord.
You need a place to live and if your goal and dream is owning a house, then by all means do you! However, it’s important to understand that a house is not an investment — and neither is a car.
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5. You don’t have a plan for your credit score goals.
You should never invest without a plan and a clear vision of your long-term goals. These are two key components of investing: level of risk and the timeframe. You can’t know either for your personal goals without having a plan first.
For starters, your credit score plays a huge factor in many of your financial milestones in life. To begin making your plan, you should know where your credit score stands. Start by getting your free score to establish where you’re starting from.
After that, you’ll have a better idea of what you might want to improve. Instead of doing nothing about your credit score, make it a goal to talk to someone who specializes in credit repair in the next month.
6. You have no savings.
Having money in the bank for emergencies is necessary before you start investing. If you put all of your money into investments only to find the next month your car needs a major repair, you’re likely going to end up dipping into a line of credit. Doing so will continue to put a strain on your finances.
Worse things can happen too like losing your job or getting sick. These financial burdens can upset your life plans and goals. If you have to rely on lines of credit to get you through tough times, your debt-to-credit ratio will increase. You’ll also be more likely to miss payments. Both of these actions will cause your credit score to decrease.
7. You’ve done no research.
Investing isn’t something that should be done blindly. You should have a general idea of what the terms mean, what the best options are for beginners, and how your asset allocation will work towards your long-term goals.
Start here with Investing 101: A Beginner’s Guide To Investing to get an idea of what you would like to pursue. There are also ample additional resources available including books, podcasts, and blogs on investing and personal finance.
Knowing what your next step should be can be murky, especially financially. No one can truly predict what is going to happen. That said, there is plenty you can do to be prepared. As the old saying goes: Hope for the best but expect the worst — and you’ll be okay.
If you’re currently in any of these situations, know that there is a light at the end of the tunnel. With a plan and financial education, you can work towards your goals and make them a reality — including opening investment accounts. Good luck!