If you’re a new investor, one of the first questions you will ask yourself is “how much should I invest?”
It’s $5,000! Just kidding, there is no one right answer.
However, I can help you figure this out how much you should invest. The amount invested depends on:
- Your financial goals – this could be buying a home, moving overseas or retiring
- Your risk tolerance – how comfortable you are with market volatility
- How much you can afford – how much extra money you can put towards investing
The reason I’m not giving you a flat “Invest 15% of your income” is because it really depends on your goals.
It’s important to understand what you want from investing, before you figure out how much.
I’d urge you to have a think about what you want your investing efforts to result in. Are you interested in an extra income stream? To retire at 50? Or, to simply get rich?
The more aggressive your goal, the more you will need to invest.
Once you’ve figured out what your investing goals are, let’s go to the next step – figuring out what your risk tolerance is.
If your portfolio dropped by 30% in one day, would that stress you out? If it would, then investing significant amounts in the stock market may not be suitable for you.
Stock market investing can be very volatile. Markets fluctuate daily and so does the cost of your portfolio.
You may have $12,000 one day and $9,000 the next.
If you are not comfortable with this kind of volatility, It would make sense to not invest a large percentage of your income. This is to avoid a key investing disaster – selling at a loss.
However, if you are willing to take on more risk – investing large amounts will work well for you. Younger people often have higher risk tolerances as they have more time. This means that they can wait for the stock market to recover during a cash. An older person who is closer to retirement and needs cash, may have a lower risk tolerance.
Now that you have figured out your risk tolerance, let’s move on to the next step.
How much extra do you have per month?
The amount that you invest will depend on your disposable income – what you have after necessary expenses and payments.
It’s hard to say “Invest 25%” when disposable income is 10% of your total salary. Investing should not be prioritised over paying high-interest debt or saving for an emergency fund. However, you can always cut down discretionary expenses such as going out to eat or shopping if you want to invest more.
Find out how much you can spare with budgeting your income and expenditure for a few months.
If you need some help with saving money so you can invest, you can check out one of my articles on this topic.
Okay, so much should I be investing exactly?
Now for the fun part.
Now that you have created your financial goals, determined your risk tolerance and know how much extra you have to invest – you are ready.
You can find out how much you should be investing with an investment calculator.
There are many different free investment calculators out there online. You can check out my favourite one by clicking here.
There’s a couple of different ways you can use these calculators.
You could start with a reasonable amount you think you can invest and for how long. For example, let’s say I want to invest $137 a week for 30 years. I can add those numbers to my calculator and see I will have one million dollars at the end of the 30 years.
Or, you can do it by figuring out how much you want first and work backwards. Let’s say you want one million dollars in 30 years. And, you currently have $10,000. You can work backwards, changing the contribution cost around until you reach the desired number.
You can see a screenshot of this calculation here:
How much do I invest?
You might be wondering, how much I as a financial blogger invest.
Before I tell you the figure, let’s go through the same 3 steps outlined above.
- Financial goals: Financial freedom, save for a house deposit and early retirement
- Risk tolerance: High, I am comfortable to take risks with investing as I am in my 20s
- Affordability: After my expenses, I money leftover to invest
As you can see, I have some pretty big money goals and am also willing to take on more risk with investing. This means I can invest a large percentage of my income every month.
Therefore, I currently invest around 40% of my income.
I hope this article helped you answer the question “how much should I invest”!