Investing money for the first time can be an intimidating prospect, especially for beginners who are just starting out. Determining how much to invest as a novice investor depends on several factors, including your financial situation, investment goals, risk tolerance and investment time horizon.
Determine Your Financial Situation
Before deciding how much to invest, take an honest look at your overall financial situation. This includes:
- Your income – How much money do you make each month from your job, business or other sources?
- Your expenses – What are your necessary monthly expenses like housing, transportation, food, etc?
- Your savings – How much do you already have saved in emergency, retirement and other savings accounts?
- Your debt – How much do you owe on credit cards, student loans and other debts?
- Your financial goals – Do you need money for an upcoming major purchase like a house or car?
Having a solid understanding of your monthly cash flow and overall monetary resources and obligations allows you to determine how much “extra” money you can afford to invest.
Set Investment Goals
It’s critical for first-time investors to clearly define their investment goals. Common investing goals include:
- Saving for retirement – Many beginners start by investing for long-term growth for retirement.
- Building an emergency fund – Investing money to save for unexpected expenses.
- Generating passive income – Some investors seek to create an extra income stream.
- Funding education – Investing can help pay for college or vocational training.
- Buying a house – Investors may save for a down payment on a home.
Having clear investment goals helps dictate how much you need to invest and your ideal investment timeline.
Consider Your Risk Tolerance
An important factor in determining investment amount is your personal risk tolerance or how much market volatility and potential losses you’re comfortable with. Key considerations for risk tolerance include:
- Investment time horizon – Can you keep money invested for long periods like 10+ years?
- Income stability – Is your income steady and reliable if investments lose money?
- Loss acceptance – How would losing 10%, 20% or more of an investment emotionally affect you?
- Temperament – Are you a patient, disciplined investor or prone to rash decisions when markets fall?
Generally, investors with lower risk tolerance may want to make smaller investment amounts than aggressive investors who can withstand more risk.
Consider Your Investment Time Horizon
Your investment time horizon, or the length of time you plan to hold investments before accessing the money, also impacts ideal investment amounts. Key time horizons include:
- Short-term – Less than 3 years
- Medium-term – 3 to 10 years
- Long-term – More than 10 years
Investors with longer time horizons can generally make larger investment amounts since early losses can be potentially recovered over time. Short-term investors may want to invest less given the higher risk.
Percentage of Income Method
One common rule of thumb for determining investment amount is linking it to your annual income. Here are some general investment percentage guidelines based on income level:
| Annual Income | Investment % of Income |
|---|---|
| $30,000 or less | 10% |
| $30,000 to $50,000 | 15% |
| $50,000 to $100,000 | 20% |
| Over $100,000 | 25% |
So for example, an investor making $75,000 per year could potentially invest 15% to 20% of their income, or $11,250 to $15,000.
Pros
- Links investments to income level
- Higher incomes allow for larger investments
- Forces savings discipline by setting aside a percentage
Cons
- Doesn’t account for other individual factors
- Percentages are general rule of thumb only
- May encourage overinvestment by high earners
Investment Vehicle Method
Another approach is to look at the minimum investment amounts required for certain common investment vehicles like these:
| Investment Type | Typical Minimum Investment |
|---|---|
| Mutual funds | $1,000 to $3,000 |
| ETFs | $500 to $1,000 |
| Stocks | $100+ per stock |
| Real estate crowdfunding | $500 to $1,000 |
Beginners may consider starting with the minimum investment amounts for one or more investment vehicles they are interested in using for their goals.
Pros
- Easy to determine based on fixed minimums
- Gets investor started investing quickly
- Option to invest in multiple vehicles
Cons
- Doesn’t account for individual factors
- Minimums may encourage underinvestment
- Investor may not have enough funds to properly diversify
Consider Getting Professional Advice
While these general guidelines can help point you in the right direction, it’s often wise for beginners to consult a trusted financial advisor for personalized advice on how much to invest. Pros of getting professional financial advice include:
- Expertise creating customized investment plan
- Assistance selecting best investment vehicles
- Guidance on asset allocation and diversification
- Ongoing investment performance monitoring
- Unbiased third-party perspective
Just make sure to vet any advisor thoroughly on factors like experience, qualifications, services and fees to find one that’s a good fit.
Start Small and Increase Over Time
One of the biggest mistakes first-time investors make is investing too much too soon. It’s generally wise to start small and increase your investment amounts over time as you gain knowledge, experience and confidence.
Benefits of starting small include:
- Learning the basics while minimizing risk
- Testing your risk tolerance
- Developing sound investment habits
- Having funds to dollar cost average into markets
Even investing just $50 or $100 per month can be a great way for rookie investors to get their feet wet in the markets.
Consider Dollar Cost Averaging
Dollar cost averaging is an investment approach that can be very effective for beginners. With dollar cost averaging, you invest a set amount on a regular schedule, like $200 every two weeks.
Benefits of dollar cost averaging include:
- Disciplined approach prevents emotional decisions
- Ability to invest smaller amounts consistently
- Reduced risk from buying at varied prices
- Takes guesswork out of timing the markets
Dollar cost averaging takes the stress out of deciding when and how much to invest for first-timers. Apps like Acorns and Robinhood make dollar cost averaging easy.
Review and Adjust Regularly
Once you’ve determined an initial investment amount as a beginner, it’s smart to review and adjust it on a regular basis. Factors to review include:
- Changes in financial situation and income
- Progress toward reaching investment goals
- Evolution of risk tolerance
- Life events like marriage, home purchase, or new child
Reevaluate your ideal investment amount annually or when major life events occur. Increase or decrease based on changes in your personal situation and investment objectives.
Conclusion
Deciding how much to invest when you’re just starting out can seem complicated. But following some basic guidelines centered around your financial situation, investment goals and risk tolerance makes it very manageable. While there are general rules of thumb, connecting with a financial advisor for personalized guidance is wise. Dollar cost averaging offers an easy way for novices to start small and build up their investment amounts steadily over time. The most important thing is to just get started investing regularly, even if the amount seems trivial. Developing smart investing habits early pays huge dividends over the long run.
