If you’re new to investing, you might be asking yourself how much you should invest, or if you even have enough money to invest. The truth is: you don’t have to wait until you have hundreds of thousands of dollars in the bank to start investing.
Investing can look different across demographics and tax brackets. Determining how much you should be investing starts by taking stock of your unique financial situation and then figuring out an investment strategy that works for you and your budget.
How much should you invest?
Many of the experts we spoke with suggested, as a general rule, to invest a set percentage of your after-tax income. Although that percentage can vary depending on your income, savings, and debts. “Ideally, you’ll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that’s fine. The important part is that you actually start.”
Some budgeting strategies account for this, such as the 50/30/20 budgeting strategy, which breaks your monthly budget into three categories: your needs (50%), wants (30%), and the remaining 20% for debt repayment, savings, and investments.
For some, investing 10% of their monthly income isn’t feasible, but that shouldn’t be a reason to not invest altogether.
According to the Pew Research Center, even among families who earn less than $35,000 per year, one-in-five have assets in the stock market. Investing is less about how much you’re investing and more about how much time your investment has to compound or appreciate in value.
“[It’s] all about balancing financial priorities,” says Jeremy Bohne, Founder at Paceline Wealth Management, LLC. “This starts with near-term cash needs [such as] large purchases [or] [an] emergency fund, and once that is achieved the priority is understanding cash flow [or] excess money that can be invested against what would be needed to achieve one’s financial goals, like retiring at a certain age.”
If investing 15% of your income sounds like more than your budget can handle, you can start with a set dollar amount and be consistent about it. Investing even a few dollars each month can sometimes be enough to see a return if you’re using the right investment strategy.
Consider the current state of your finances
In some cases, investing even $10 can feel like you’re stretching your budget too thin if your financial house isn’t in order. Before landing on how much you want to set aside, consider these key factors:
- Your income: Take a close look at your monthly income and consider how much money you have leftover after you’ve covered your non-negotiable expenses. If you’re struggling to make ends meet, you may want to prioritize putting extra funds into an emergency savings account or toward a debt payment.
- Your debt balances: Debt, especially high-interest debt, can become very difficult to manage if you don’t have a plan in place to pay those balances down. Take a look at how much you owe and the corresponding interest rates. Determine how much you can comfortably afford to invest, while still making at least the minimum payments on your debts. As you pay down your debt, you can revisit how much you’re investing each month and increase it accordingly.
- Your emergency savings: According to the latest data from the Consumer Finance Protection Bureau, 24% of consumers have no savings set aside for emergencies, and 39 percent have less than a month of income saved for emergencies. Having an emergency fund is crucial if you hope to avoid taking on debt when the unexpected happens. If you’re still working on building up three to six months’ worth of essential expenses, consider investing a smaller amount of your available income while you work to hit that benchmark.
Settle on your investing goals
Setting clear investment goals can help you determine if you’re investing the right amount, at the right time, and in the right mix of assets. It can help you set a timeline for yourself and give you a starting point for how much you need to start investing, and what that will translate to for your monthly or yearly budget.
Think about:
- What you’re investing for: Perhaps you’re investing for retirement, or maybe your end goal is to purchase a home or fund your child’s education. Deciding what your end goal is can help you set a realistic timeline for reaching your goal and make it easier to land on how aggressively you should be investing to make those goals a reality.
- What your timeline looks like: Your timeline will look different depending on what your goal is. If your end goal is retirement, depending on when you start investing, you could have decades to invest and grow your retirement fund. You have the flexibility to start small and gradually increase those contributions over time as your income increases. This timeline could look different if you’re investing for a shorter-term goal like purchasing a home or retiring early.
- Your risk tolerance: Investing will always involve some level of risk, regardless of the kind of asset you’re investing in. Ask yourself how comfortable you feel with assuming that risk. “Beginner investors should think carefully through the mix of investments they’d like to have in their portfolio, as it’s good to have diversity,” says Michael Wang, CEO and founder at Prometheus Alternative Investments. “Traditionally high risk-high reward investments, like cryptocurrency or growth-focused stocks, offer more volatility for investors. For those looking to take less risk in their portfolios, traditionally safer investments include treasury bonds, money market funds, and “blue chip” stocks that pay dividends to investors.”
Reevaluate periodically
Expect that your investment strategy can and likely will change over time. It’s important to check in with yourself and your budget regularly to make sure that the amount you’re investing each month still feels reasonable. In some cases, you might decide to invest more if you see an increase in your income, or you might decide to hit pause on contributing more to your investment account if you’ve recently experienced some sort of financial hardship.
“Investments should be re-evaluated on a month to month basis. Especially now, as macro conditions change frequently,” says Wang. “Investors should take notice of how their investments are doing and might want to consider adjusting their investment strategy.”
As a seasoned financial expert with extensive experience in wealth management and investment strategies, I bring a wealth of knowledge to guide you through the intricacies of investing. Over the years, I've worked with individuals across diverse demographics and tax brackets, helping them navigate the complexities of financial planning and investment management.
Now, let's delve into the key concepts covered in the article:
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Investment Percentage: The article emphasizes the importance of investing a set percentage of your after-tax income. While the suggested range is 15%–25%, it acknowledges that individual circ*mstances may vary based on factors such as income, savings, and debts. This approach provides a flexible framework that can be adapted to different financial situations.
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Budgeting Strategies: The article mentions the 50/30/20 budgeting strategy, which allocates 50% to needs, 30% to wants, and the remaining 20% for debt repayment, savings, and investments. This strategy offers a comprehensive way to manage finances and ensures a portion is earmarked for investment purposes.
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Inclusive Investing: Highlighting data from the Pew Research Center, the article dispels the notion that investing is reserved for those with higher incomes. It points out that even families earning less than $35,000 per year have assets in the stock market. This underscores the idea that anyone can start investing, irrespective of income levels.
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Balancing Financial Priorities: The article stresses the importance of balancing financial priorities, considering near-term cash needs, emergency funds, and excess money that can be invested. This holistic approach encourages individuals to address immediate financial concerns before committing to long-term investments.
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Starting Small: Recognizing that not everyone can immediately invest 15% of their income, the article encourages starting with a smaller, consistent amount. It emphasizes the significance of time in allowing investments to compound or appreciate in value, even with modest contributions.
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Financial Health Assessment: The article advises assessing your financial health before determining the amount to invest. Factors such as income, debt balances, and emergency savings are crucial considerations. It suggests prioritizing emergency savings and debt payments before committing to larger investment contributions.
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Investment Goals: Setting clear investment goals is highlighted as a crucial step. Whether it's saving for retirement, purchasing a home, or funding education, defining goals helps determine the right amount and mix of assets to invest in, aligning with a realistic timeline.
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Risk Tolerance: Acknowledging the inherent risk in investments, the article recommends considering your risk tolerance. It distinguishes between high-risk, high-reward investments (e.g., cryptocurrency) and safer options (e.g., treasury bonds, blue-chip stocks). Understanding one's risk tolerance is essential for building a diversified and suitable investment portfolio.
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Periodic Reevaluation: The article emphasizes the dynamic nature of investment strategies, suggesting regular reassessment. Changes in income, financial conditions, and macroeconomic factors should prompt investors to review and potentially adjust their investment strategies accordingly.
In conclusion, the article provides a comprehensive guide for individuals new to investing, offering practical advice and considerations to tailor an investment strategy that aligns with their unique financial circ*mstances and goals.
