One of the most typical questions about investing as people begin to prepare for their future is how much of your money should you invest or how much of your income should you invest. These two investing questions could have different meanings.
If the topic of finding out how much money to invest seems familiar, congratulations on foresight. Investing is not only about saving for emergencies but also for retirement. While you don’t need much to begin investing these days, the goal is to consistently contribute beyond your first commitment. This lets compound interest do its job and have a lot more money than you actually invest monthly or quarterly in the future. You also probably wonder how much should you invest in stocks in the amount you are saving for investment.
I will try to explain what is the sweet spot for the question of how much should you invest. It is also important to know how you can have both a fun life and keep investing with your income. All this is considering that you have an average income to support you.
Know Your Long-Term Goals
15% is generally the standard to invest from your income. Yet, the truth is that this depends on your long-term goals. Starting a project like investing requires a lot of time. Starting with the end in mind is almost always beneficial for long-term projects. Consider your priorities and the potential returns you want or need. Consider the retirement lifestyle you desire. Do you want to downsize or buy a new home?
Some folks have an idea of when they would want to purchase a retirement residence in general. These individuals ought to have a saving and investment rate of 10% to 20%. Others create a 20-year budget that accounts for every dollar. Everyone has a unique method, but beginning with the end in mind might help you choose the amount of effort you should devote to a goal right now.
Consider a platform that might assist you in visualizing your objectives. This will help you to consider your long-term goals better for investment. People who use Robo-advisor investment platforms like Wealthfront can get customized plans.
These plans are generally about your time horizon, risk tolerance, and expected return. To use Robo-advisors or to even get started, you must know what you want out of your investment journey.
Is There a Right Amount for Investing?
The shortest answer is that it depends. Your current financial situation and your goals are the leading factors. If you are financially stable and you have goals for the future, it’s easier to invest, and you don’t need a certain amount.
The “correct amount” for you might be different than someone else. Someone with a high credit card debt is not the same as someone without any debt. If you want to own a house in the next decade, your planning will be different from those who do not want the same thing. It is up to you to decide how much money you should invest, even though you can invest any amount.
Make these necessary calculations. Understand your current challenges and financial situation. Once you understand it, you should be able to determine an amount you can commit to investing each month. This amount will serve to help you achieve your long-term goals.
You should consider investing each month rather than putting in a lump sum. The benefits of making a lump sum investment are much less than monthly contributions.
The sum you can invest could be $2,000 each month or $10. It’s not important how much money you spend as long as it suits your needs.
Is There a Minimum Amount on Investing?
There is no specific answer for this. Depending on what you invest in, minimum amounts could vary. If you are investing in commodities or bonds, the cheapest asset is the minimum amount. However, if you are investing in stocks, this might not be the case. Most brokerages offer fractional shares at the moment. If your brokerage is also offering this, you can invest how much you want.
With fractional shares, you can buy even 0.01 of a share. However, some brokerages do not offer this option. If they don’t, the price of the stock you want to buy is the minimum to start investing. This number could change if you are thinking about investing in real estate. You should make a deep dive into what you want to invest in.
Some assets have a fractional option, like stocks. Some assets do not like physical real estate. Do not forget no matter how much it is you can afford to invest, invest it. Even $5 a month is a starting point. You can increase this number in time. The point here is to start from somewhere.
Guidelines Before Investing
Before starting to invest, you need to handle certain issues. As I mentioned above, your financial situation and goals are important. If you are financially bad, investing might not be the best option. That’s why you must go according to some guidelines. When you are in line with them, you could start investing.
Pay Off Your Debt
It might be tempting to begin making money right away. However, investing requires patience. Because of compound interest, dividends, and growth, your assets will make money slowly but steadily. They will earn more and more each day.
That’s why at first, high-interest debts will cost you more than what you make from investments. Therefore, before investing your money, pay off any debt with an interest rate greater than 8% to 10%.
Create a Budget
If you don’t have an emergency fund, no amount of investing will help you. The same goes if you can’t even pay your rent. If you want to successfully invest, you need to have a budget. Investing is extra for everyone.
By having the right budget, you can decide easier. Get your life in shape and know what you have and what you don’t. Start by writing out a monthly budget. This budget should list your fixed expenses like rent and groceries. Then, include discretionary spending to ensure you have money put aside for investing.
These spendings are mostly entertainment that you can spare. This budget should make it easier for you to decide how much money you can spare for investments.
Set up an Emergency Fund
There are billions of outcomes in life. Unexpected emergencies could happen anytime. You probably experienced an emergency before. It could be anything from medical expenses to a layoff.
To make sure that you are ready for unexpected events, have an emergency fund. Your first priority should be to build this fund. You might invest in a retirement fund for tax benefits. These accounts make it harder to access those funds.
You should keep your emergency fund in cash and not invest. For that, you must save a certain amount. The traditional number is your living cost of 6 to 12 months.
Determine how much you need for your fund. Then, make sure you have the resources available to cover an emergency by saving money.
Determining the Amount to Invest from Your Income
There are various allocations you can make for investing. Choosing one of those allocations is up to you. It is about how much you accomplished the guidelines above. Regardless, some experts made a research to understand this better. There are best and average ways to invest while keeping your essentials available.
You first must determine how much you spend on essentials. These essentials include rent, groceries, and so on. Most research says that around 50% of your income should go to essentials. You should spend about 10 to 15% on the fun. Going out for a drink, restaurant, or another stress reliever. You should divide the rest between saving and investing.
The golden rule could be to invest 15% of your income and let the rest in a savings account. At this point, considering you spend 65% and invest 15%, you have 20% left. If you already have a good emergency fund, you can make changes. You can increase the amount you invest to around 20% or even 25%, especially if you are young. All these numbers are considering that you have no debt to pay off.
Your Age In Determining How Much of Your Income Should You Invest
The most important aspect of the amount you invest is age. Where you are in life is extremely important. If you are somewhere between 18 to 25 years old, you have a lot of time on your hand. This gives you good opportunities. Because you are young, you possibly have some money to invest. Starting as early as you can and increasing the amount you invest in time will give you the best results.
That is why you must have a plan for your future. You could create this plan by your current lifestyle. What you want out of your financial life is the determining factor. Imagine your retirement or your life in thirty years.
Where do you see yourself, and how much do you need for that life? How much do you want to have in your retirement or your planned date? This will give you a head start. You can start your planning with that amount.
Later, you should think about the annual value gain on average. As an example, S&P500 brings 7% annually. This is a nice benchmark when planning for the future. You will then easily figure out how much you should invest per age until you reach your desired financial situation.
Debt vs. Investment
Is paying off debt or investing should be a priority? We answered this question above with our guidelines. However, to give more detail, paying off debt is generally better than investing. The type of debt plays a big role here.
If you have high-interest debt, paying off the debt first is better. For another type of debt, you could do a mix. For example, if you have a mortgage, its interest rate is probably low. Doing a mix of both is a good scenario in this case.
The golden rule here is to pay off high-interest debt first. Paying off other debts is about your wants and needs. The best method is to you pay off high-interest debt first. Then, you can keep on both paying debts and investing. You can invest and also be on your path to finishing off your debt. There is no rule to block you from investing when you have debt.
Don’t forget that paying off your entire debt altogether could be a big mistake if it is a low-interest debt. You can also calculate it yourself and figure out if your investment will be bigger in 10 years or if paying off debt will help you better.