If you are new to investingyou may be wondering how much you should invest or if you even have enough money to invest. It’s true: you don’t have to wait until you have hundreds of thousands of dollars bank to start investing.
Investing may look different depending on demographic and tax brackets. Determining how much you should invest starts with examining your unique financial situation and then coming up with an investment strategy that works for you and your budget.
How much should you invest?
Many of the experts we spoke to suggested investing a certain percentage of your after-tax income as a general rule of thumb. Although this percentage can vary depending on your income, savings and debts. “Ideally, you’ll invest somewhere around 15%-25% of your after-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 take this into account, such as the 50/30/20 budgeting strategy, which divides your monthly budget into three categories: your needs (50%), wants (30%), and the remaining 20% for paying off debt, saving, and investing .
For some, investing 10% of their monthly income is not feasible, but that should not be a reason not to invest fully.
According to Pew Research Centereven among families earning less than $35,000 a year, one in five owns assets in the stock market. Investing is less about how much you invest and more about how much time your investment has to grow or increase in value.
If investing 15% of your income sounds like more than your budget can handle, you can start with a specific dollar amount and be consistent with it. Investing even a few dollars each month can sometimes be enough to see a return if you use the right investment strategy.
Consider the current state of your finances
In some cases, investing as little as $10 may appear to be too thin a budget if your financial house isn’t in order. Before deciding how much to spend, consider these key factors:
- Your income: Take a close look at your monthly income and think about how much money you have left after covering 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 to pay down debt.
- Your debts: Debt, especially high-interest debt, can become very difficult to manage if you don’t have a plan to pay off that debt. See how much you owe and the associated interest. Determine how much you can comfortably afford to invest while making at least the minimum payments on your debts. As you pay down your debt, you can review how much you’re investing each month and increase it accordingly.
- Your emergency savings: According to latest data from the Consumer Finance Protection Bureau, 24% of consumers have no emergency savings and 39% have less than a month’s worth of emergency income saved. Have emergency fund it’s crucial if you hope to avoid going into debt when the unexpected happens. If you’re still working to generate three to six months’ worth of basic expenses, consider investing a smaller amount of your disposable income while you work toward that benchmark.
Determine your investment goals
Setting clear investment goals can help you determine whether you are 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 long you need to start investing and what that will mean for your monthly or annual budget.
Think about:
- What are you investing for: Maybe you’re investing for retirement, or maybe your ultimate goal is to buy a house or fund your child’s education. Deciding what your ultimate goal is can help you set a realistic timeline for achieving your goal and make it easier for you to determine how aggressively you should invest to reach those goals.
- What your timeline looks like: Your timeline will look different depending on what your goal is. If your ultimate 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 these contributions over time as your income increases. This timeline might look different if you’re investing for a shorter-term goal like buying a home or retiring early.
- Your risk tolerance: Investing will always involve a certain level of risk, regardless of the type of asset you invest in. Ask yourself how comfortable you are with taking that risk. “Beginner investors should think carefully about the mix of investments they want to have in their portfolio, because it’s good to have diversity,” says Michael Wang, CEO and founder of Prometheus Alternative Investments. “Traditionally high-risk, high-reward investments, such as cryptocurrencies or growth stocks, offer greater volatility for investors. For those looking to take less risk in their portfolios, traditionally safer investments include government bonds, mutual funds and stocks that pay dividends to investors.”
Reevaluate from time to time
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 the amount you’re investing each month is still reasonable. In some cases, you may decide to invest more if you notice an increase in your income, or you may decide to hit pause to contribute more to your investment account if you’ve recently experienced some kind of financial hardship.
“Investments should be reviewed from month to month. Especially now, when macro conditions change frequently,” says Wang. “Investors should pay attention to how their investments are performing and may consider adjusting their investment strategy.”
