When it comes to money and becoming financially secure, the first advice most people hear is: start investing as early as possible, the earlier you start the more your gains when you reach retirement. It’s always about compounding interest and how time takes care of everything for you as long as you start early. This is great advice, and it works, but only when you are already financially stable.
Back to reality for most people, when you are broke and living paycheck to paycheck, struggling with bills and unexpected expenses, you can’t prioritize investing. In fact, you don’t even think about it.
Let’s look at why investing too early at this stage can even become counter-productive and will actually keep you stuck longer. Here are five reasons why focusing on building an emergency fund makes more sense, and why it should come before investing when money is tight, how having some cash put aside changes everything.
1. Emergencies don’t care about your investments
Life is weird that way, right? It won’t stop to wait for your investments to grow, nor does it care about your long-term plans.
When a random expense hits you, be it an emergency medical bill, your car breaking down or your hours get reduced at work. Compounding won’t be of any help here.
This is cash territory, and if you don’t have any set aside for such events, it means that these expenses go straight to your credit cards or other loans. Which instantly renders your small amount investments each month useless.
This is why an emergency fund should be your primary focus, it gives you immediate access to money when you need it, which investments can’t do.
2. High interest debt wipes out investment gains
This is the biggest reason why investing too early doesn’t achieve much. Before thinking about ways to grow your money, you should first focus on stopping the leak.
Any investment gains you have get eaten away if you have high interest credit card debt. Simply because the small % you earn on the markets is too small compared to how much you are losing to interest rates every month.
The sequence should be: paying high interest debt first, it’s even better if you avoid it altogether, and instead build an emergency fund which is a guaranteed win as there is no market risk involved.
3. Investing without an emergency fund increases stress
People always say investing is for the long-term and it’s safe and should make you calm and ready for the future. But when you invest too early and when you are broke, it just adds to your already existing stress.
Without and emergency fund, every market drop hits too hard, every unexpected expense puts you into crisis mode, and you always worry about selling your stocks and pulling money to close the gaps.
All of this is why many people think that investing doesn’t actually work, because they are too stressed to stay in for the long term, and they end up always pulling out at the worst times and losing more money when selling.
A small emergency fund goes a long way to alter your mindset and reduce your stress levels. Because when you have one, you are now investing from a place of stability.
4. Emergency funds are key to stop debt from accumulating quickly
Many people actually have good money habits, and the reason they fall into debt is only because something unexpected happens in their lives and they have no cash buffer to deal with it.
Simple put, without an emergency fund, expect a small unexpected problem to turn into credit card debt, which in turn locks you into minimum credit card payments every month. These minimum payments keep you stuck in a loop.
That’s where emergency funds come in to save the day. You get access to money to solve these small problems instantly, which stops any debt at the very beginning and breaks the cycle. This is a huge change that can save you from financial stress.
5. Stability before growth
You can’t really expect to grow your money before your finances become stable first.
When you are poor and still trying to fix your money habits and finances, you won’t be able to hold on to investments for long enough to make them work for you.
You can only start thinking about investing when you have a small emergency fund, and you have your credit card debt under control. That’s when investing actually works the way it’s supposed to. Stability is the foundation of your financial freedom.
How much should you put aside for an emergency fund
This is going to be different from person to person, and obviously the more you set aside the better. But you don’t actually need that much.
The rule of thumb is to have an amount that let’s you cover three to six months of your living expenses. That way, if anything major happens, like a job loss for instance, you’d have enough money to live comfortably while sorting things out and getting back on your feet again.
To build this fund, always start small. Contributing a small amount each month works. A few hundred dollars every month is a good start. Try to focus on building towards having enough expenses for one month, then gradually work toward three to six months.
Like everything else, the first step is always the hardest, but it’s also the most rewarding. Knowing that this is going to save you from financial stress should be motivation enough to keep you going.
Why this works better than investing first
It’s about making sure you are ready for the long term game of investing. The timing is very important here, as investing early most likely means that whenever something comes up, the first thing you’d think about is pulling your money out. That keeps you stuck in poverty longer.
An emergency fund gives you flexibility, control over unexpected expenses, and more confidence when you start investing.
Final thoughts
If you don’t have an emergency fund yet, and you still feel bad about not investing early, it’s time to change that mentality. You are not behind, you just need to sort out your priorities first.
An emergency fund protects you from making more money mistakes, and provides you with more options and peace of mind. It’s the important foundation that makes your investing journey calm and stress-free, as it should be.
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