“How Much Should You Invest? A Beginner’s Guide”

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Investing vs. Saving

If you’re just getting started with investing, you may be wondering how much of your income you should allocate. Many experts suggest investing 10% to 20% of your income, but the exact amount depends on various factors. Fortunately, you can start investing with minimal amounts—some platforms allow you to begin with as little as $1. The key to successful investing is regular contributions, which allow you to benefit from more time in the market.

Investing vs. Saving

While both investing and saving involve setting money aside for the future, they serve different purposes and come with different levels of risk. Understanding when to save and when to invest is crucial for determining how much of your income to allocate to each.

Saving typically involves placing money in low-risk accounts like high-yield savings accounts or certificates of deposit (CDs) at federally insured banks or credit unions. These accounts offer easy access to your funds and protect against losses, although they generally provide lower returns.

Investing, on the other hand, involves purchasing assets such as stocks, bonds, and mutual funds with the hope of earning a profit over time. While investments have the potential for higher returns, they also come with a higher risk of losing money. The level of risk varies depending on the type of investment.

Both saving and investing are essential components of a solid financial foundation. Some financial experts recommend saving 5% and investing 15% of your income to balance the two.

Short-Term Savings Goals

For short-term goals or needs, consider saving money in an account where you can access it quickly. If you anticipate needing funds within the next five to seven years, a savings account or other safe, interest-bearing account is often the best choice. You might save for:

• Emergency fund
• Down payment on a home or car
• Wedding
• Vacation
• Upcoming expenses

Long-Term Investment Goals

Invest money you don’t expect to need for several years to allow it to grow significantly through compound interest and to ride out market fluctuations. Long-term investments can be used for:

• Retirement
• College education for your child
• Wealth building
• Protection against inflation
• Tax savings

How Much Should You Invest?

While aiming to invest 15% of your income is a good target, it may not be feasible for everyone. The amount you can afford to invest may change over time based on your financial situation. Before investing a significant portion of your income, ensure you have a solid financial foundation. This includes having an emergency fund with three to six months of living expenses and paying down high-interest debt.

To determine how much you can invest, examine your cash flow. Start with your monthly income, subtract your expenses and savings, and see how much is left over. This is your potential investment amount. If it’s more than 15% of your income and you can afford it, consider investing more. The more you invest, the greater your potential gains.

Don’t delay investing because you have less than 15% of your income available. Invest what you can afford and look for ways to free up more money for investing. For example, you can invest your tax refund, commission, holiday bonus, or other lump sums of cash to boost your investment portfolio.

How to Start Investing

Once you’ve determined how much to invest, the next step is to get started. Here are some options:

401(k)

If your employer offers a 401(k) plan, it’s one of the easiest ways to start investing. You can invest pretax dollars, reducing your current taxable income and delaying taxes on contributions and earnings until retirement. Contributions are automatically deducted from your earnings and invested in assets you choose from the plan’s offerings. If your employer matches contributions, take advantage of it—it’s essentially free money for your retirement.

IRA

If you don’t have access to a 401(k), consider an individual retirement account (IRA). IRAs offer tax advantages to help you save for retirement. With a traditional IRA, you contribute pretax earnings and pay taxes upon withdrawal during retirement. A Roth IRA allows you to invest after-tax dollars and make tax-free withdrawals in retirement, provided the account has been open for at least five years. Contribution limits depend 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 option that won’t penalize you for early withdrawals, consider a robo-advisor. These online platforms create personalized investment plans based on your time horizon, risk tolerance, and estimated return. While some platforms charge fees, they are generally less expensive than working with a broker. Compare apps to find the best option for you.

Financial Advisor or Stockbroker

If you prefer to discuss your investment plan with a person and have them manage your portfolio, working with a financial advisor or stockbroker may be a better option. This route is more expensive but can be beneficial depending on the amount you have to invest and the level of assistance you need.

All investments carry the risk of losing some or all of your money. Consider your risk tolerance when choosing investments and determining how much to invest in each.

The Bottom Line

Investing 15% of your income is a good rule of thumb for meeting long-term goals. Even if you can’t afford to invest that much today, start with what you can. Your investment amount may fluctuate as your cash flow changes, but staying consistent can pay off in the long run.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions for your future.

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