Investing is a proven way to build wealth for long-term goals like retirement or college. And the earlier you get started, the more time you give for your money to grow.
But investing before you have cash savings is a recipe for trouble — having $20,000 in an IRA won’t help you if you lose your job with only ten bucks in your checking account. That’s why you should first focus on building up your cash reserves or “emergency” savings before you start a long-term investment program.
How much to stash can vary. If you’re the sole breadwinner, having a cash backup equal to six to 12 months of expenses is safe. If you have a working spouse, three to six months worth of expenses should do. Put this money in an FDIC-insured account that you can easily access in an emergency.
That doesn’t necessarily mean that you shouldn’t do any investing until you have that cash cushion. For example, if you can invest in a 401(k) with a company match you’ll want to take advantage of that. Just don’t go full bore until you have those backup funds in place.