If you are considering investing less than $1,000 in a robo-advisor, consider holding off. For most people, it only really makes sense to start investing after you have about $1,000. Here’s why.

Rainy Day Fund

Before you start investing money, it’s a good idea to have a rainy-day fund for those unexpected emergencies, such as a car repair. You’ll have to think through what kind of events might happen to you, but, a $1,000 safety net is a good rule of thumb.

For example, if you are healthy and have steady job, and your parents would be happy to lend you money, you might set aside a smaller rainy day fund.

But if you are working an hourly job, have people counting on you, would lose your income if you can’t make it to your job, and have an out-of-warranty car… then you need to allocate a larger rainy day fund.

Put your rainy-day fund in a savings account at a bank, not an investment account. While a savings account won’t increase in value like an investment account at a robo-advisor, it won’t go down either. In fact, even if the bank goes out of business, your savings are insured by the FDIC.

Pay Off Your Credit Card Debt

Second, you should pay off high-interest credit card debt. Did you know that if you pay just the minimum amount due on your credit, you may end up paying more in interest than you actually borrowed? Credit cards can be a helpful way to manage a one time big ticket purchase such as an appliance. But, you should generally plan to get out of credit card debt – it just doesn’t make sense to rack up all those interest charges.

There are new services to help people refinance their credit card debt at reasonable rates such as Marcus and Lending Club. FSRankings will be talking more about these services soon!

Invest Conservatively for a “Job Loss” Fund

Once you have a rainy day fund and are paying down your credit card debt, it’s time to create a fund to cover your living expenses if you lose your job.

A common rule of thumb is 3 months, but, if you are in an industry where it’s tough to find a job, and don’t have family and friends who can help you out, you may need 6 or 9 months of living expenses.

You can afford to invest some of the money, but at a low risk of losing value if the stock market goes down. So you should select a conservative approach. The situation you want to watch out for is what happened in 2008: the stock market dropping more than 50%. By having a robo-advisor (or human advisor) create a conservative portfolio, during a financial crisis your portfolio would drop by far less than 50%. In fact, during the 2008 crisis some bond funds actually went up when the stock market went down.

Once you have a well sized job loss fund, it replaces your rainy day fund.

See FSRanking’s recommendations for $10,000 for advice that generally matches a Job Loss Fund.

Invest As Appropriate

Once you have a rainy day fund, have paid off your credit card debt, and have a job loss fund created, now is the time to dial up the risk and return to the level appropriate for you. This is where you have the most options, factoring in

  • Your risk tolerance
  • How many years left of earning you have left
  • How much you’ve already saved

This is where robo-advisors shine! They will create a custom portfolio for you based on the information about your financial situation.

Let’s go back to the example of 2008. It certainly would have hurt to lose more than 50% of your investment. Nevertheless, for someone with many more years of work left, it may have been appropriate to have a heavy allocation to stocks. In fact, if you put all your money into the S&P 500 in Oct 2007, the absolute peak of stock valuations before the crash of 2008… and stuck with it during the 2008 declines… ten years later, by 2017, you would have still nearly doubled your money.

At this point, there are decisions to make on whether you save money in a tax deferred account (such as a 401k or IRA or Roth IRA) or a regular account. Most of the robo-advisors listed on FSRankings will support whichever account type you decide makes sense for you. For a helpful guide on which type of account to open, see the CNN Money Ultimate Guide to Retirement.

The upshot

Before you invest $1,000 with a robo-advisor, create a rainy day fund for those unexpected emergencies. Hopefully you’ll never have to tap into it, but if you do you’ll be glad to have that fund.