In this article:
- Investment versus savings
- How much should you invest?
- How to start investing
If you're new to investing, you may be wondering how much of your income you should invest. Many experts recommend investing 10% to 20% of your income, but how much you can afford to invest depends on many factors.
Fortunately, it doesn't cost much to start investing; on some platforms you can get started with as little as €1. The key to ensuring your investment pays off is to contribute regularly so you can benefit from more time in the market.
Investment versus savings
Investing and saving both involve putting money aside for the future, but they are not the same. The difference lies in your goals and timeline for the money and risk level. Understanding when to save and when to invest is important in deciding how much of your income to invest.
Hideset money aside in low-risk bank or credit union accounts so you can easily access it in the near future. When you focus on saving money, you typically choose accounts that offer protection against losses. For example, you can deposit money into asavings account with high returnsofcertificate of deposit (CD)at a federally insured bank or credit union. You won't earn anyconsiderable interest, but the risk of losing money is very low.
Investmentinvolves purchasing assets such as stocks, bonds, mutual funds, and more, in the hopes that you will make a profit over time. Investments potentially offer higher returns, but also come with a greater risk of losing money. The degree of risk depends on the type of investment, for example shares, bonds, investment funds and the like.
Saving and investing are both important parts of a solid financial foundation. To balance the two, some financial experts recommend saving 5% and investing 15%.
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Short-term savings goals
Consider saving money in an account where you can access it quickly for short-term goals or needs. If you think you'll need money within the next five to seven years, it's often best to keep it in a savings account or other safe, interest-bearing account.
You can put money in a savings account for your:
- Acute fund
- Down payment on home or car
- Wedding
- Holidays
- Upcoming releases
Long-term investment goals
It is best to invest money that you do not expect to need in the coming years. This gives your investments time to grow significantlyrenter's interestand allows you to avoid market fluctuations.
You can use investments to:
- Retirement
- Higher education for your child
- Building wealth
- Protection against inflation
- Tax savings
How much should you invest?
While 15% is a good goal to aim for, it won't work for everyone. The amount you can afford to invest can change over time depending on how your life and finances change.
Securing your financial foundation is an important step to take before investing a significant portion of your monthly income. If you don't have an emergency fund, make it a prioritysave three to six months of basic living expensesto cover financial emergencies. Paying off high-interest debt, such as credit card balances, is another smart move to save money that you can then use to invest.
Examine your cash flow to understand how much extra money you need to invest. Start with your monthly income, subtract your expenses and savings and see how much you have left. That is the amount you can invest every month. If it is more than 15% of your monthly income and you can afford to invest more, you should do so. The more you invest, the more capital you have for potential profits.
On the other hand, you shouldn't put off investing because you have less than 15% of your income available to invest. Instead, invest what you can afford or give it a tryreduce or eliminate some expensesto free up money for you to invest. Once you've maxed out your budget, look for other options to add to your investment allocation. This way you can invest your tax refund, commission, holiday allowance and other lump sums in cash or windfalls to increase your investment portfolio.
How to start investing
Once you know how much income you need to invest, the next step is to get started. You have various options to invest yourself or with a little help.
401(k)
If your employer offers one401(k)-plan, this is one of the easiest ways to get started. A 401(k) allows you to invest pre-tax dollars, reduce your current taxable income, and defer taxes on both your contributions and earnings until you withdraw the money in retirement. Your contributions are automatically deducted from your income and invested in the assets you choose from the plan's offerings.
If your employer reimburses part of your contributions, you should take advantage of that; it's essentially free money going towards your retirement. Make sure you understand how long you need to stay with your companypurchased. If you leave too early, you may lose all or part of your employer match.
IRA
If you don't have access to a 401(k), aindividual retirement account (IRA)is a good investment opportunity. An IRA is a tax-advantaged savings account that allows you to save for retirement. With a traditional IRA, you contribute pre-tax income and defer paying taxes until you withdraw from your account during retirement. ARoth IRAThis allows you to invest after-tax dollars and then make tax-free withdrawals in retirement, provided your account has been open for at least five years. Thatamount you can contributeeach year is limited based on your age, filing status, income, and IRA type.
Robo-advisor
If you've maxed out your 401(k) or IRA contributions, or want an investment option that won't penalize you if you cash out your investments before retirement, work with a broker. A cost-effective way to invest through a brokerage is with a robo-advisor.Robo-advisorsare online automated platforms that help you create a personalized investment plan based on your investment horizon, risk tolerance and estimated returns. Some platforms charge fees, but these are cheaper than working with a broker. Still, you'll want to compare apps to find the best option.
Financial advisor or stockbroker
Working with a financial advisor or stock broker may be better than using a robo-advisor if you want to discuss your investment plan with someone and have that person manage your portfolio. This ismore expensive route, but can be beneficial depending on the amount you need to invest and the assistance you want.
With all investments there is a risk that you may lose some or all of your money. Consider how much risk you are willing to accept – in other words, yoursrisk tolerance. This plays an important role in the types of investments you make and the amount you invest in them.
it comes down to
Investing 15% of your income is generally a good rule of thumb for achieving your long-term goals. Even if you can't afford to invest that much today, you can still do sostart investingwith what you can afford. Your investment amount may fluctuate as your cash flow changes, but staying consistent can pay off in the long run.
