How much should you invest, according to experts?

Investments may vary by demographics and tax system. Deciding how much to invest starts with understanding your financial situation and finding an investment strategy that works for you and your budget.

How much should I invest?

As a general rule, many of the experts we spoke to suggested investing a certain percentage of your after-tax income. However, that percentage depends on your income, savings, and debt. “Ideally, you'll be investing somewhere between 15 and 25 percent of your after-tax income,” says Mark Henry, founder and CEO of Alloy Wealth Management. “If you need to start small and work towards your goal, that's fine. The important thing is to actually start.”

Some budgeting strategies take this into account. The 50/30/20 budgeting strategy divides your monthly budget into three categories: needs (50%), wants (30%), and the remaining 20% ​​for debt repayment and savings. , and investment.

Investing 10% of your monthly income may not be practical for some people, but that's no reason not to invest completely.

According to the Pew Research Center, one in five households with an annual income of less than $35,000 has assets in the stock market. Investing is less about how much money you invest and more about how long it takes for the value of your investment to compound or appreciate.

“[It’s] It’s all about balancing financial priorities,” says Jeremy Bourne, founder of Paceline Wealth Management LLC. “This starts with short-term cash needs [such as] big shopping [or] [an] Once you have an emergency fund and have achieved it, understanding your cash flow should be a priority. [or] Surplus funds that can be invested against the funds needed to achieve a financial goal, such as retiring at a certain age. ”

If you think investing 15% of your income is beyond your budget, you can start with a set amount and stay consistent. If you use the right investment strategy, investing just a few dollars each month can give you a good return.

Consider your current financial situation

Sometimes, if your finances aren't in order, investing even $10 can feel like you're stretching your budget too much. Before deciding how much money you want to set aside, consider these important factors:

1. 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 money into an emergency savings account or paying off debt.
2. Your debt balance: Debt, especially high-interest debt, can be very difficult to manage if you don't have a repayment plan in place. Look at the amount you owe and the corresponding interest rate. Determine the amount you can comfortably invest while still making at least minimum debt payments. As you pay down your debt, you can review your monthly investment amount and increase it accordingly.
3. Emergency savings: According to the latest data from the Consumer Financial Protection Bureau, 24% of consumers have no savings for emergencies, and 39% have less than one month of income saved for emergencies. Having an emergency fund is very important to avoid going into debt when the unexpected happens. If you're still trying to accumulate three to six months' worth of essential expenses, consider investing some of your available income while you work towards achieving that benchmark.

Decide on investment goals

Setting clear investment goals will help you determine whether you are investing the right amount, at the right time, and with the right mix of assets. This will help you set a timeline for yourself and give you a starting point for how much money you need to start investing and how much it will affect your monthly or annual budget.

think about:

• What are you investing for? Perhaps you are investing for your retirement. Or maybe your end goal is to buy a home or finance your child's education. Determining your end goals will help you set a realistic timeline for achieving them and help you determine how aggressively you should invest in making those goals a reality.
• The timeline should look like this: Your timeline will depend on your goals. If your ultimate goal is retirement, depending on when you start investing, it could take decades to invest and grow your retirement savings. You have the flexibility to start small and gradually increase your contributions as your income increases. This timeline may look different if you're investing toward a short-term goal, such as buying a home or retiring early.
• Your risk tolerance: Regardless of the type of asset you are investing in, investing always involves some degree of risk. Ask yourself how comfortable you are with taking on that risk. Michael Wang, founder and CEO of Prometheus Alternative Investments, said: “Novice investors should think carefully about the mix of investments they want to include in their portfolio. Diversity is important. Because it's a good thing.” “Traditional high-risk, high-return investments, such as cryptocurrencies and growth-oriented stocks, introduce greater volatility for investors.For those looking to reduce portfolio risk, traditionally safer investments include government bonds, money – Includes market funds and “blue chip stocks” that pay dividends to investors. ”

Reassess regularly

Assume that your investment strategy can and will likely change over time. It's important to regularly check in with yourself and your budget to make sure the amount you invest each month still feels reasonable. In some cases, you may decide to invest more if you see an increase in your income. You may also decide to pause additional contributions to your investment account if you have recently experienced any financial hardship.

“Investments should be reevaluated on a monthly basis, especially now as macro conditions change frequently,” Wang says. “Investors may need to pay attention to how their investments are performing and consider adjusting their investment strategies.”