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How Much of Your Money Should You Invest? Let’s Figure That Out

Your capital may be at risk. This material is not investment advice.
Matthew O'Connor
Written by trading expert:Professional Day Trader
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Short resume:
  • Author of the book Options Trading for beginners
  • Worked in finance in 12 years
  • Got a MBA in Finance, BA, International Business Administration And Marketing
  • Built a solid record of achievements through constantly developing financial markets
  • Traded on the most frequently utilized stock exchanges: TSE, LSE,NASDAQ, NYSE, Euronex Actively managed a 6-9 million dollar portfolio
  • Developed new and innovative trading systems and implemented them during trading hours
Matthew O'Connor is the author on the bestseller Option Trading for Beginners
Option Trading for Beginners - Written by Matthew O'Connor

Regardless of what your annual income is, the amount of money you can invest per year needs to be based on your goals. Having investment goals not only helps you develop a clear target, but it also helps you stay motivated to make your money grow. So exactly how much of your money should you invest?

It differs from person to person. Base your investment goals on how much you can actually afford to invest. For example, if your annual income is $60,000, you could feel constrained by your living expenses and other investments — but don’t fret.

As long as you keep your eyes on the prize, you should be able to invest more money as you gradually make more money. Follow our guide to achieving your financial investment goals and watch your idle money grow in no time. You’ll learn what could be preventing you from investing and how to get started on making the most of your income.

Why You Should Invest Even With Low Income

Investing a portion of your income is smart for many reasons. You’ll be able to increase your wealth over time. You’ll also be able to save for anything you need or want in the future with ease.

How much to invest depends on your income, age, investment goals, and risk tolerance. For instance, a 30-year-old earning $50,000 a year with a $1 million retirement savings goal should be saving $500 a month. This is assuming that they have an average annual return of 6.5 percent.

Ultimately, whether or not you should invest depends more on what your goals are than how much you’re earning. There are plenty of people managing to invest while earning less than $50,000 per year. Remember that even the smallest amount counts.

Setting Realistic Goals

By age 30, there are probably many goals a person has in mind that they aspire to achieve. That can include having their own children and family or simply being able to retire on time. As people’s goals vary, so do their options on how much to invest.

Using a $50,000 income as an example, many of the goals above may seem impossible. Yet, if you keep in mind that you’re likely to earn more income over time, then those very same goals become very much possible. Avoid allowing what you currently earn dictate how soon you’ll achieve your financial goals.

With that being said, keep your goals realistic. Prioritize your investment plan and target each of your goals separately. For instance, if you aspire to retire on time and are currently earning $50,000 per year, don’t expect to do so before age 65.

Input some of your assumptions into an online retirement calculator. This will indicate your need for a particular amount of money — that will be your target. Then using an online savings calculator, and assuming a 6.5 percent average annual return, you’ll learn that you’ll need to save at least $500 each month from age 30 onwards.

Creating a Spending Plan

A common mistake that people make when designing their personal spending plan is them basing their savings amounts on their monthly expenses. This only leaves their savings amounts on what they have leftover after their expenses. You can quickly understand how much to invest once you get rid of this bad financial habit.

You’re more prone to sporadic investments this way which can result in no money being available to you in the future. When your expenses run high one month, what will you have to fall back on? You can reverse this process and determine your monthly expenses around your savings goals instead.

With a savings goal of $500, for example, that amount will become your first expenditure. This task gets easier if you have an automatic deduction from your income set up. You’ll be forced to manage your expenses better and save for retirement simultaneously.

Store a Percentage of Your Income

For those still asking, “How much of your money should you invest?” here’s our short answer: between 10 and 15 percent of your annual income. With a savings goal of $500 per month amounts to 12 percent of your $50,000 annual income. This is an appropriate amount of your salary.

If you expect your income to increase on an average of four percent a year, your savings amount will automatically increase by four percent. Within 10 years, your yearly savings can go from $6,000 a year to $8,540 a year. And by age 55, your annual savings will expand to $16,000 a year.

This goes to show how you can efficiently reach a savings goal of $1 million by age 65 with a $50,000 annual income.

Base Your Investments on Your Risk Profile

Using the same investment plan we previously mentioned, we’re also assuming a 6.5 percent annual rate return. You can achieve this while the stock market continues on its historical pattern. It assumes this investment profile and invests in large-cap stocks.

If you prefer investments that are less risky than stocks, consider lowering your assumed rate of return. This requires you to increase the amount of money you invest. And this is the perfect option if you are averse to risk.

When you are younger, there is a longer time span to earn, putting you in a better position for risk and the potential for greater returns. As you get closer to your retirement goal, you will most likely want to add more investments based on a fixed income. You should remain focused on a 6.5 percent annual rate of return benchmark.

By doing so, you should be able to create a portfolio allocation that fits your risk profile as time goes on. This allows you to maintain a consistent monthly investment. You’ll be on your way to seeing your money grow in no time!

So How Much of Your Money Should You Invest?

So how much of your money should you invest? As you can tell, it depends on your financial investment goals and your strategy with your annual income. But that’s not all — there’s a lot more to learn about investing your money the right way.

For more information on reaching your investment goals this year, register with IQ Option South Africa today!

The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future. In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.
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