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How Much of My Income Should I Invest? A Detailed Guide

21 September 2020 No Comment

Did you know most Americans don’t have money to cover a 1000 dollar emergency? If you want tips on saving and investing your money, we can help.

In this guide, we’ll answer the question, “How much of my income should I invest?”

Want to learn more? Keep reading.

What Are Your Financial Goals?

Do you hope to start a business or save for retirement? Some people want to set aside funds for their children’s education. Others want to spend their fifties traveling.

Take some time thinking about your financial goals before you think about investing. Make goals that are specific and clear.

Outline when you’ve achieved the goal and what action you need to take.

How relevant are the goals? Create a time frame for every goal so you can see the progress.

How Much Do You Spend Every Month?

Before you invest your money, you need to determine your budget for the month. How much money do you have available after you pay bills?

Look at your budget and see where you’re overspending. If you’re spending too much on entertainment or subscriptions, cut back on those areas.

To begin investing, first, pay all your bills on time each month. With your leftover money, you can create an investing strategy. But first, you need to separate your savings.

Save an Emergency Fund

You need an emergency fund if a disaster occurs and you can’t work for a bit. Work hard to save up to six months of living expenses.

If you spend around 4000 dollars every month on everything, aim to save three months’ worth. The amount is about 12,000 dollars.

After, work toward a goal to save up to six months of living expenses. This way, you can cover your main costs during this time while you try to find more work.

Build your emergency savings. Once you have savings, you can start investing some money.

Investing and Saving for Retirement

Retirement saving is as significant as your emergency fund. Emergency savings are there for desperate needs.

Your retirement savings will support you once you’re done work. There are special investment accounts for retirement like 401(k) and IRAs.

A 401(k) gets sponsored by your employer and is a retirement savings plan. You can invest some of your paychecks before taxes get removed.

Taxes won’t get paid until you withdraw the money from the account.

You can control how your money will get invested with a 401(k). Most plans will offer a spread of mutual funds made of bonds, stocks, and money market investments.

A popular option is target-date funds. Target date funds are a combo of bonds and stocks that get conservative as you approach

retirement.

Try Micro-Investing

Once you figure out how much disposable income you have, use a part of that money and invest it in a few different ways.

You could try micro-investing. You can get started with investing by using your spare change. One massive barrier is people think they don’t have the money to invest.

Micro-investing is when you invest in small increments. You will buy fractions of shares. There are micro-investing apps like Acorns. Invest with as little as five dollars.

You can set your account up by connecting it to a funding source like your checking account.

Acorns will round every transaction to the closest whole number. It will pull the difference from your checking account and invest it in your Acorns account.

If you want to start investing, consider using Acorns.

Try House Flipping

If you have experience in marketing, renovation, and real estate, consider house flipping. You will need the capital and ability to oversee repairs.

Real estate flippers are different from landlords who rent to tenants. As a real estate flipper, you will look to sell an undervalued property within six months.

You won’t invest in improving the properties. Instead, you’ll look for investments that already have an intrinsic value.

If you can’t sell a property fast, you might pay for a mortgage on a property.

You could also buy a reasonably priced property and add more value by renovating the space. This is a longer-term investment, so you might only be able to afford one at a time.

If you can renovate houses and like real estate, consider this investment option.

Mutual Funds

Mutual funds let you invest in a portfolio of bonds and stocks with one single transaction. This is an option if you’re a new investor.

Many mutual fund companies need an initial investment between 500-5000 dollars. If you’re new to investing, you might find it difficult to reach that amount.

Yet some mutual fund companies will waive the amount if you agree to monthly investments of $100. Aim to invest 10 percent of your income.

Automatic investing is a common feature with ETF IRA and mutual fund accounts. The automatic investing arrangement is convenient if you can do it through payroll savings.

Create an automatic deposit through your payroll like you would with an employer-sponsored retirement plan. Ask your HR department how to set this up.

If you want to try trading stocks, learn more about trading stock options benefits.

Now You Know the Answer to “How Much of My Income Should I Invest?”

We hope this guide on investing was helpful. Figure out your budget and how much money you can invest. Next, you’ll want to decide how you will invest the funds.

Now that you know the answer to “How much of my income should I invest?” start investing.

Browse our other helpful resources on finances, management, and more.

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