Investing is an essential part of building and maintaining financial stability. It allows you to plan for long-term expenses, like the cost of your child’s education or ensuring you have a comfortable retirement. But investing is only one piece of the puzzle.
To truly set yourself up for success, you should balance investing with other financial goals, such as building an emergency fund, paying off debt and covering day-to-day expenses. Finding that balance can be tricky, but we’ve got some tips to help you get there.
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How much should you invest each month?
The general rule of thumb is to save “10% to 15% of your gross salary per month,” said Rob Burnette, CEO and investment advisor representative at Outlook Financial Center. But it may not be easy to start investing that much immediately. “You may need to look at some adjustments to your spending and grow into this savings rate over time,” Burnette said.
Bear in mind that 10% to 15% of your income is just a rule of thumb. Your montly investment contribution should be tailored to your unique financial position. So how much should you aim to invest each month? As yourself the following questions to help figure this out.
How much room do you have in your budget?
You can’t invest money you don’t have, and you shouldn’t invest money that’s earmarked for another purpose, like debt payments, savings and monthly bills.
One of the best ways to determine how much you have to invest is to look at your budget — or to create one if you haven’t already. This will help you see how much money is coming in and going out each month and how much is left over for investing.
Do you have enough emergency savings?
Unplanned expenses happen and when they do, they can be catastrophic if you don’t have the money to cover them. For example, you never know when your car may need a repair or you may have a medical emergency that prevents you from working for an extended time.
Most experts recommend having between three and six months’ worth of expenses in a savings account at all times. If you don’t have any emergency savings or you don’t have much saved up, you may want to limit your long-term investing efforts until your savings account is fully funded.
Do you have high-interest debt?
In general, you should focus more on investing than paying off debt when your investments earn more than you’re paying in interest. But if you have high-interest debt, paying that debt off should be your top priority. This may mean limiting your investment activities until your this debt is a thing of the past.
How much will you need in retirement?
“When planning how much money they will need in retirement, consumers should consider their desired lifestyle — things like travel, hobbies and health care needs,” said Dutch Mendenhall, founder of RAD Diversified.
Once you have a number in mind, consider “Social Security, pensions and other income streams” to determine how much you need to invest to fund this lifestyle, Mendenhall said.
A retirement calculator can help you determine how much you should invest each month to reach your goal.
Do you have other investment goals?
Retirement isn’t the only reason you might want to invest. It can help you achieve any long-term goal, such as paying for your children’s education or building a down payment for a home.
Consider all of your long-term goals and how much money you’ll need to achieve them. Then, use an investment calculator to determine how much you’ll need to contribute each month to achieve those goals.
Tips to boost your investments
Now that you know how much to invest each month, these tips can help you grow your investment portfolio.
- Open a retirement account. Retirement accounts, such as 401(k)s and IRAs, offer tax advantages that can help you reduce your tax burden and maximize your returns.
- Take advantage of employer matching. Employer matches are essentially free money. “If your employer offers an employer-sponsored retirement plan, you should contribute up to the match,” said Jason Bernat, President and CEO of American Financial Services. “After that, consider opening a Roth IRA and a taxable brokerage account,” added Burnette.
- Consider a robo-advisor. Robo-advisors are online platforms that manage your investment portfolio for you based on your goals and risk tolerance. If you’re a beginner investor or prefer a “set it and forget it” approach, a robo-advisor can help simplify your investing.
- Diversify your portfolio. If you invest in only one — or even a handful of — assets, your risk is highly concentrated. By spreading your money across multiple assets, you minimize your losses if one asset takes a hit. Robo-advisors typically do this for you, but if you’re managing your own portfolio, you can boost your asset mix by investing in index funds and diversified ETFs.
- Free up more funds for investing. Review your budget for expenses you can cut or minimize. For example, you could save money on eating out by cooking at home or cancel your cable service. Any opportunity you can find to trim your budget is an opportunity to expand your investing activities, which can have a big payoff down the road.
- Consider age-based allocation. You have more time to recover from losses when you’re young than you do as you near retirement. Age-based allocation helps you produce larger gains earlier in life while limiting risk later. Under this approach, you put a percentage equal to your age in low-risk investments like bonds and the remainder in higher-risk, higher-reward investments like stocks. For example, if you’re 35 years old, you’d invest 35% of your portfolio in safe-haven investments and 65% of your portfolio in stocks. When you’re 65, that allocation will be flipped, focusing 65% of your portfolio on low-risk assets and 35% on stocks.
Your investment strategy should grow with you
Your financial situation will change over time. As it does, your investment strategy should adapt to accommodate these changes.
For example, if you get a raise, you could put more each month toward your investments. If a costly home repair saps your savings, you may need to limit your investing activities until you replenish your emergency fund.
Remember that however much you can put away right now, every little bit counts.
