How much should I invest, and where should I invest? These might seem like straightforward questions, but they also carry a lot of weight. How much money you invest and which investments you choose depend on a number of factors, key among them the income at your disposal, your financial stability, and your aspirations.
To get a good feel of the amount of money you ought to invest, start by asking yourself a few questions.
How much passive income do you need?
The amount of money to invest will come down to the amount of passive income you want in return, be it monthly or yearly. Passive income should factor into all the expenditures that you intend to cater for, such as the price of a new home, car, or that dream holiday.
The amount of passive income you need will determine the amount of capital you put into investments for optimum returns.
How much can you risk?
How much you should invest also depends on the amount of risk you can tolerate while investing. In financial markets, the value of investments is often subject to high levels of volatility that cause the prices and value of underlying assets to move up and down rapidly.
The faster you want to get rich, the higher the amount of capital you will have to invest. While trading in big volumes and order sizes is a good way of accrue returns faster, you must also be ready to account for the big price swings that come into play. Don’t invest more than you can afford to lose.
How long do you have?
The time at which you would wish to access the returns will determine the amount of money you ought to invest. For instance, those who wish to generate significant returns over a short period might consider short-term trading strategies such as day trading, as well as trading with leverage. For people trying to save for retirement, investing in tax-free accounts, tax-deferred accounts, and retirement plans often come with requirements such as the age at which one can access final returns.
Invest a percentage of your income
To build a good investment nest egg capable of generating significant returns over time, you need to be disciplined. We recommend investing a set percentage of your income every month, but not more than you can afford to lose. However, you should understand that there is a big difference between investing and saving.
While putting money into savings accounts also amounts to investing, returns in such accounts are small (albeit also zero-risk). On the flip side, investing in the stock market brings higher risks but also higher potential returns, should things work out.
While investing a percentage of your income is the way to go, the total amount will always come down to your current financial situation and goals. The earlier you start to invest, the less you will have to save, given the positive effects of compound returns.