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9 Signs You Are Ready to Invest

Jake - Author/Founder

Hi. I'm Jake, a frugal Canadian Engineer. I believe you can build a great life through frugal living and index investing.

Investing is the common focus in the personal finance community. It’s “fun”.

But there is a problem.

Most millennials are not ready to invest, as described in this post. 

So let’s take a step back and first see if you are ready to invest in stocks/bonds. Before investing, I strongly belive you need to meet these criteria:  

  • Paid down all consumer debt
  • Have a fully funded emergency fund
  • You can fund your sinking funds for expenses coming due in the next 5 years. 

After this point, you may be ready to invest. 

This article is for DIY investors who hold stocks and bonds. But many concepts in this post are helpful, even if someone else manages your portfolio. 

Find a “ready to invest” checklist at the end of this post. 

Table of Contents

1. You Have Eliminated High Interest Debt (Must)

When you pay down high-interest debt, you receive a “risk-free” return equal to the interest rate on the debt.

For example, say that you pay down $1,000 on credit card debt with a 20% interest rate. You save $200/ year in interest payments. That’s a 20% guaranteed return on that $1,000.

Not bad. Actually, better than “not bad”. 

These types of risk-free returns cannot be achieved by even the best investors.

Even Warren Buffet can’t guarantee a 20% return each year.  Although his Berkshire Hathaway averages close to a 20% return in the long term, which is wild.

It’s not fair to compare stock market returns to the interest rate on debt, because of risk. Stock market returns are not risk-free returns.

My rough rule of thumb is that you are not ready to invest until you have paid down all debt with an interest rate over 5%. You just can’t beat the risk-free return

I dislike debt. Therefore, I like to take it one step further.

I believe all consumer debt should be eliminated before investing, regardless of the interest rate. This builds good habits to avoid consumer debt in the future. 

That means no car loan, no credit card debt, and no furniture or appliance financing. 

Check out this post on pay down debt vs invest for more detail on the debt pay-down vs. investment assessment.

2. You Have an Fully Loaded Emergency Fund (Must)

You’ve probably heard this a million times – don’t invest until you have an emergency fund equal to 3-6 months of essential expenses.

To be successful as an investor, you must be able to endure the ups and downs without selling. Investments pay you for waiting, for years. 

What do you do when your car needs a $3,000 engine change because you were driving like a numpty?  An emergency fund saves the day.

Without an emergency fund, you would need to sell investments, perhaps during a market downturn. That’s bad.

And an emergency fund is important, regardless of investing. It provides a phycological buffer that reduces money stress and anxiety.

I like to sleep well, and prefer to rid myself of unnecessary worry. An emergency fund is critical to reducing stress. 

3. You Understand Your Investments (Must)

It’s a bright sign that you are ready to invest when you understand the basics of where investment returns come from.

You don’t have to be a pro, but you should educate yourself. Here are two of my favourite books on the subject:  

I firmly believe it is your job to understand your investments, whether it’s stocks, bonds, or cash-flowing real estate. This even applies even when someone else is investing your money for you. 

Where do Investment Returns Come From?

Owning a stock means you own a fraction of a business. As the business grows, so does your fraction of the business. 

You can view this as a pie. The business is the pie. Your slice of the pie grows as the business grows, as long as the number of slices remains the same.  

Stock returns are rooted in two factors: (1) earnings growth and (2) dividends. 

I discuss these two factors in more detail in this post on why a stock market crash may be good for you.  

When stock prices swing violently, I know that the underlying companies are still growing earnings and paying dividends. 

Understanding the source of stock returns provides a calming effect during market turmoil. 

Now let’s look at the different ways to hold stocks. 

4. You Understand The 3 Main Ways to Own Stocks And Bonds

You are not ready to invest until you understand the 3 primary ways to own stocks: 

I’ve ordered them from least effective to most effective: 

  1. Owning Individual Stocks (Direct Ownership)
  2. Mutual Funds (Indirect Ownership)
  3. Low-Cost Index Funds (Indirect Ownership)

Individual Stocks/Bonds: The worst option for the majority of investors. It’s a pain in the ass to keep up to date with balance sheets, income statements and competitors. 

Then you need to do this for 30+ stocks. It’s time-consuming. Most people just don’t have the time (or skills). 

Actively Managed Mutual Funds: You put your money into a fund and a pro stock picker will (actively) use the fund money to buy individual stocks. These guys rarely beat the market (source) and charge high fees that erode your wealth.

Low-cost Total Market Index Funds hold all stocks in a stock market for negligible fees. I hold these guys. Learn more about index funds and the reasons they are awesome in this post.  

5. You Understand Investment Risk (Should)

Let’s consider George who put $10,000 of savings into an S&P500 index fund in 2007, in hopes to grow the money to pay for tuition. 

George is 100% returning to school in 2009.

Then the S&P500 loses 37% in 2008 due to the financial crisis. 

George was not ready to invest.  

His time horizon of 2 years was not long enough to be investing in stocks. Not even close. 

A portfolio of 100% stocks is only suitable for those who can leave the money alone for 10+ years. No touchy. 

Because George took on too much risk, he was forced to sell his stocks for a 37% loss.

Risk Tolerance: Ability and Willingness to Take Risk

George did not have the ability to endure the ups and downs of the market, because his time horizon was too short.

Your ability to take risk is related to how long you can wait before you must draw down your investments. Ability to take risk is influenced by things like income stability, your savings rate and your age.

The second aspect is your willingness to take risk. This one is 100% behavioral. It is based on how you respond to market swings.

I encourage you to read more about investment risk and risk tolerance in this post on Investment Risk and Risk Tolerance: An Introduction.

6. You Acknowledge Your Human Biases (Must)

As discussed above, willingness to take risk is often the limiting factor for millennials (and Gen Z).

Our irrational emotions cause us to buy high and sell low.  These actions are responses to fear.

Investing is Simple, But Hard

Fear of loss is the main culprit in destroying investment returns. This looks like panic selling when the market drops, or jumping into hot stocks/sectors due to fear of missing out (FOMO).

There are two steps to limit the influence of human biases:

  • Step 1 is to take a step back and acknowledge that you are at risk of making irrational investment decisions. This requires humility and is not easy (especially for young dudes).
  • Step 2 is to put systems in place to control these biases and protect yourself from yourself.

DIY investors are at the greatest risk of emotional decision-making. An unbiased perspective is one of the best benefits of a financial advisor.

An advisor can provide an unbiased perspective to keep DIY investors grounded. Or, they can manage your portfolio entirely. 

Just watch out for high fee mutual funds often pushed by advisors. Look for an advisor who uses low-cost index funds.

7. You Set Your Asset Allocation (Must)

“Asset allocation” is a fancy term for the number of stocks and bonds in your portfolio.

Bonds are less risky and more stable than stocks. These guys can be used to “pad” a portfolio and reduce the intensity of the up and down swings (volatility). 

The asset allocation can be adjusted to match your total risk tolerance. Common asset allocations are: 

  • 100% Stocks, 0% Bonds
  • 80% Stocks, 20% Bonds
  • 60% Stocks, 40% Bonds

A good test of your ability to handle a 100% portfolio of stocks is to ask yourself one question: 

What would I do if my investments lost 50% of their value and it took 7 years to recover? 

  • Would you still sleep well at night?
  • Would you panic sell? 

As bonds are added to a portfolio,  you can expect less of a downturn in the worst-case scenario. 

As a rule of thumb, you want to add bonds to a portfolio until you are able to sleep well at night. 

You can use this Vanguard Investor Questionaire to get an idea of an asset allocation that matches your risk tolerance. 

8. You Have a Pre-Set Investing System (Must)

You are not ready to invest until you have a specific investing system in place that you can follow. 

How often you will invest?

What will you invest in to meet your asset allocation? 

You can’t just “go with the flow” with investing. I love this lax, hippie-like, attitude when on trips or mountain biking. 

But it fails when it comes to investing. 

Market volatility stimulates my feelings. And these feelings make me want to do stupid things. Having a strict investing system is a safety net for irrational decisions. 

Here are a few examples of a few specific investing systems:

  • Invest $1000 every two months into VTI and VEA in a way that keeps 70% of the portfolio in US stocks (VTI) and 30% in international stocks (VEA).
  • Katie the Canadian invests $1000 per month into VEQT.
  • George invests $500 per paycheck (every 2 weeks), into VT.

Notice that the system is specific and entirely focused on things that are within your control. 

This cuts the noise out of investing. 

  • War in Ukraine? Follow the system.
  • Interest rates are rising? Follow the system.
  • Economists predict a recession.  Follow the system.
  • Your friend lost money in the market. Follow the system.
  • Your friend made money in a hot stock.  Follow the system.

You are not ready to invest until you (or your advisor) have set out an investing system that is in line with your unique risk tolerance. 

9. You Have an Employer Match (An Exception).

An employer match for a RRSP or 401K is free tax-free money. When you think about it, an employer match is equal to a 100% return on the money you put into the RRSP or 401K.

This condition produces some exceptions to the rules above.

It can be smart to contribute (and invest) the amount needed to get the full employer match when:

  • You have a small emergency fund equal to 1 month of essential expenses.
  • You are still paying off debt with an interest rate of over 5%. 
  • You don’t understand investments fully.  

The 100% risk-free return offered by the match far exceeds the interest rate of any debts, including credit card debt. 

The human behavioral aspect comes into play here. Because debt represents a psychological ball and chain, you should always be making progress towards getting rid of consumer debt. 

Therefore, there is a balance between the employer match and debt paydown. I wouldn’t want to stall debt paydown entirely just to meet the employer match, even though it makes sense on paper.

Failure and Perfection: A Final Consideration

You will never start investing if you seek perfection in all of these points.

Mistakes made with a small portfolio are easily recovered later on, and it trains you to reduce mistakes when your portfolio gets larger. 

You learn about your human fallibilities and become a humbler and more disciplined investor.

Investing mistakes are best viewed as tuition, as long as you reflect and learn from them. It may make you feel better to learn about my mistakes – I share them in this article. 

These mistakes are best made when young, and with low dollar amounts. Youth and small portfolios go hand in hand. Room for error is highest for young investors due to high future earnings potential, and time to recover. 

Readiness To Invest Checklist


I have paid down all debt with an interest rate greater than 5%.



I have an emergency fund worth 3-6 months of essential expenses



I have read and understood Investment Risk and Risk Tolerance: An Introduction.



I have read this post on Index Funds and actively managed funds  



I have read this post on Behavior and Investing: 7 Ways to Control Biases



I (or my advisor) have set an asset allocation (Stock/Bond Target) based on my unique risk tolerance. (Vanguard Questionnaire)  



I have set an investing system to hat align with my asset allocation.



I invest in my target funds consistently, regardless of what economists predict and what is in the news.


A Random Walk Down Wall Street will set you up to cover points 3 to 6. This book may be the best investment you’ll make. 

I hope you enjoyed it. Don’t hesitate to reach out for a coaching session to understand your risk tolerance better and learn about investing. 

Jake out.