As a beginner or aspiring investor, you may wonder how to fit investing into your monthly budget. In a nutshell, you don’t need a lot of money to get started.
There are also no definite rules on how much of your income should go to investments. Instead, you can learn different expert tips while considering your own situation when deciding how much to invest.
1. Using rules of thumb as guides
You’ll find plenty of “rules” for investing, including different ways to allocate your money in investments and how much to put in. Here are a few:
- 10-20% of your monthly income
Many experts recommend setting aside 10-20% of your income every month for investments. There are budgeting strategies that take this allocation into account.
Under the 50/30/20 method, 50% of your income should go to needs, 30% to wants, and 20% to savings and investments. If you’re paying off debt or haven’t built an emergency fund yet, it’s ideal to work on them before you invest.
With your obligations taken care of, any amount you decide to invest may have a better potential to grow without interruptions. This is because you’re less likely to withdraw from investments prematurely.
One version of this budgeting method advocates for a 50/15/5 allocation. You’ll still earmark 50% of your income for needs then assign 15% of your income for investing goals like retirement. The remaining 5% will go to emergencies.
This method allows you to simultaneously set aside money for investing and emergency funds so you can get started on both.
- Investing only what you can afford to lose
Another common investing advice is to invest only the amount you can afford to lose.
This may suit you if your priority is to minimize loss or if you’re building up experience and confidence before investing higher amounts. You can consider investing more as your financial situation improves.
2. Looking at your situation
Since your experience and preferences are unique, it’s best to treat investing rules as options that you can customize according to your situation. To do so, consider your budget and goals.
- How much can you afford to invest?
If setting aside 10%-20% of your income is too high for now, you may want to start with an amount that’s easier on the pocket. From there, you can gradually work your way up.
Starting small lets you start early so you can give your investments more time to grow. If you’ll invest without disruptions for a longer period, you’ll have a better chance of speeding up the growth of your money through the effects of compounding.
You can also consider increasing your allocation if you have the capacity to invest more of your income. It’s ideal to revisit this amount regularly to account for any life changes.
- How much money do you aim to have?
The “right” amount of money to invest can also vary depending on your goal. Are you investing enough to get the amount you want by the time you need it?
It can be hard to calculate exactly how much you’ll earn from investments, especially if the returns are not fixed. You can instead estimate what you might earn given your planned investment amount and target return rate.
This will tell you if you’re investing enough or if you have some catching up to do to get closer to your goal. You can also consider adjusting your target so that it’s within reach given your financial capacity.
What matters most is that you’ll start as soon as you’re ready. This will allow you to take advantage of one of the best assets any investor can have: time.
