How Much Should I Invest? A Quick Guide

Deciding to invest won’t ever be an easy task, especially if you’re fairly new to the field. This doesn’t mean going into investing is impossible, though.

For newcomers to the field, it’s especially helpful to understand the basics of investments before ever releasing money out into your chosen accounts, stocks, or other forms of investments.

In this case, it helps to know just exactly how much you should invest. Here’s a quick guide for you.

Identify Your Goals First

One of the most important considerations you need to have when thinking about investments is your overall investment goal.

A lot of people choose to invest for different reasons – you can choose to invest to finance your child’s education, save up for your retirement, or even build an investment portfolio. Important considerations can include:

How much money do you currently earn? Of this money, how much are you willing to put in an investment?
What are the things you have to pay for, such as your utilities and other spending? Do you have to pay your Visa and Mastercard bills, or other debt?
What are the things you want to get out of a potential investment? Are you looking into a material belonging such as a house or a car? Are you looking into insurance? Are you looking into building an investment portfolio?
How soon do you want to get your returns?

Some of these things need a bit of technical considerations, such as manually calculating returns (by yourself or with an investment professional) and even consulting companies or institutions you want to invest in.

However, identifying the elements above are great first steps on the matter.

Saving Versus Investing

A lot of new investors often worry about “balancing” their funds for savings and investing. This is why we end up with questions like “how much of my savings should I invest?” and this makes sense.

You might want to approach this by identifying the differences between investing and saving in the first place. For instance:

Savings accounts generally have lower returns. In the case of savings, most of the money here usually ends up as “liquid,” meaning you can withdraw these at any time without fees or penalties.

Investment accounts potentially have higher returns, but are “less” liquid. This means they’re not necessarily available for speedy withdrawal, and may be subjected to fees and taxes.
Emergency funds, a third category we’re opening up, should also be a consideration for people who want to start investing. This is a good third option, especially if you’re already starting a savings account. Having an emergency fund can be a good source of immediate cash should emergencies happen. Likewise, having an emergency fund won’t compromise your investments and savings should this happen.

Investment Strategies: What Should You Use?

Now, to the heart of the matter: Just how much exactly should you invest? This is a tricky question, because as you might’ve noticed, it also depends on the goals you’ve listed above.

This depends on what kind of investment you want to have, and what sort of investments you want to take. Some strategies that are common amongst individuals include:

The 10-Percent Rule. This is one of the most common “rules of thumb” when it comes to finances. In general, 10-percent of your income should at least go to your savings. This doesn’t mean you should always save “just” 10-percent. However, you should probably at least consider investing 10-percent of your income somewhere.

Remember, your retirement savings is still an investment. As much as possible, have 10-percent of your income automatically invested through what’s called a tax-advantaged retirement account. This rule of thumb makes it much easier for everyone to at least save a bit of their income for retirement.

You can turn this up a notch by actually investing as much as 15-percent to 20-percent of your income. For these professionals, the logic is that the more you get to save now, the more money you’ll get to have or use in the long run.

Talk with an employer for your 401(k). When it comes to your retirement funds, you might find it interesting to learn that you can actually try negotiating with employers to have them assist you in your 401k contributions. This can help you save more money, as employers will immediately allocate part of your salary to your savings.

These deals depend on your contract at work. For instance, if you and your employer have a 3-percent match agreement, this means you will contribute 3-percent of your salary to your 401(k), and your employer will be adding another 3-percent. If you choose to add more to your account, your employer will stick to adding to the set contribution.

You should pay attention to these deals, as employers matching in your investments means you’re getting free money for your future, and a 100-percent return of your investments. That’s because your employers will only match your contributions if you contribute.

What about your risks? Risk pertains to the likelihood or possibility of experiencing losses compared to returns. This can happen a lot when you invest in the stock market, as not all companies experience growth in a particular amount of time. How should you approach this?

A lot of this has to do with your goals, how much risk you’re willing to take, and what sort of investment timeframe you have. Age plays a huge factor when it comes to risk, as younger professionals have more time to accumulate money to make investments compared to older people.

Regardless of age, one of the best methods of protecting the money you’re investing is through making a diversified portfolio. This means owning many kinds of different investments.

A huge part of this involves investing in different sorts of companies across different fields. That way, even if a field or industry experiences a drop in stocks, you don’t necessarily have to worry about money you have in that particular place.

Invest Whatever You Can. A more unorthodox approach to your investments could be investing as much as you can to invest. The logic here is that it makes sense to invest money you’re not using for other purposes. You can start using your extra money to work towards tax-advantaged retirement benefits, and then open up a taxable investment account afterwards.

A huge aspect of your success in this regard does depend on the kind of money you have and the kind of lifestyle you want to have in the long run. This is especially if you’re meeting your financial goals and still have a bit of money to spare.

Investing 101: How Much To Invest Depends On You

With the above in mind, you’ll hopefully get a better understanding as to how exactly you’ll be able to determine how much you should invest.

As you’ve noticed the above isn’t an in-depth guide as a lot of this has to do with how much money you have, how much money you spend, and how much money you want to allot for investments.

Remember, identifying how much you can allot for investments and what you want to make of those investments can greatly help zero in on how much you should invest.