investment may look different based on demographics and tax brackets. Determining how much to invest starts by taking stock of your unique financial situation and then determining an investment strategy that works for you and your budget.
how much should i invest?
Many of the experts we spoke with suggested, as a general rule of thumb, investing a flat percentage of your after-tax income. although that percentage can vary depending on your income, savings and debts. “Ideally, you’ll invest 15% to 25% of your after-tax income,” says Mark Henry, founder and CEO of Alloy Wealth Management. “If you need to start small 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 debt . payments, savings and investments.
For some, investing 10% of your monthly income isn’t feasible, but that shouldn’t be a reason to stop investing.
According to the Pew Research Center, even among families earning less than $35,000 a year, one in five have assets in the stock market. Investing is less about how much you’re investing and more about how long your investment has to accumulate or appreciate in value.
“[It’s] about balancing financial priorities,” says Jeremy Bohne, founder of Paceline Heritage Management, LLC. “This starts with short-term cash needs [such as] large purchases [or] [an] emergency fund, and once that’s achieved, the priority is to understand cash flow [or] excess money being spent. you can invest against what it would take to reach one’s financial goals, such as retiring at a certain age.”
If investing 15% of your income seems like more than your budget can handle, you can start with a flat dollar amount and stick with 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 seem like you’re stretching your budget too far if your financial house isn’t in order. Before determining 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 left after you’ve covered your non-negotiable expenses. If you’re struggling to make ends meet, you may want to prioritize putting additional funds into an emergency savings account or for 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 off those balances. See 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 review how much you’re investing each month and increase accordingly.
- Your emergency savings: According to the latest data from the Office of Consumer Finance Protection, 24% of consumers have no savings set aside for emergencies and 39% have less than a month of income saved for emergencies. Having an emergency fund is crucial if you hope to avoid going into debt when the unexpected happens. If you’re still working to rack up essential expenses for three to six months, consider investing a smaller amount of your disposable income while you work toward that benchmark.
set your investment 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. can help you set a timeline for yourself and give you a starting point of how much you need to start investing and what that will translate to for your monthly or yearly budget.
- What you’re investing for: Maybe you’re investing for your retirement, or maybe your ultimate goal is to buy a home or finance your child’s education. Deciding what your ultimate goal is can help you set a realistic timeline for reaching your goal and make it easier to determine how aggressively you need to invest to make those goals a reality.
- 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 those contributions over time as your income grows. 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 some level of risk, regardless of the type of asset you are investing in. ask yourself how comfortable you feel taking that risk. “Beginning investors should think carefully about the mix of investments they would like to have in their portfolio, as diversity is good to have,” says Michael Wang, CEO and founder of Prometheus Alternative Investments. “Traditionally high-risk, high-reward investments like cryptocurrencies 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 investors dividends.”
Expect that your investment strategy can and probably 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 still feels reasonable. In some cases, you may decide to invest more if you see an increase in your income, or you may decide to pause to contribute more to your investment account if you have recently experienced some kind of financial hardship.
“investments should be reevaluated month by month. especially now, as macro conditions change frequently,” says wang. “Investors should take note of how their investments are doing and might consider adjusting their investment strategy.”