How Much To Invest? 3 Important Things to Consider Before You Start Investing
So you want to start investing:
But how much should you invest?
The right answer is “it depends”.
But what does it depend on? And where should you get started with your calculations?
Although there is no one-size-fits-all answer, we thought it would be useful to provide some pointers on where to begin to help you figure out how much to invest.
How Much To Invest? 3 Things to Consider
When it comes to investing, whether it’s P2P loans, stocks or cryptocurrencies, there are a few things you want to take into account when figuring out how much to invest:
- Your goals
- Your risk tolerance
- Accessibility of the asset
Let’s dive into each one.
1. What are your goals?
This is the natural place to begin: what are your goals? Why are you investing? Is it for something long-term like retirement or your children’s future? Or something more short term like buying a house?
This goal will help give you a rough idea of how much you want saved up. If it’s a house, €50,000 might be enough for a deposit. If it’s a lot more long term, then maybe you’re looking at €500,000!
Work your way backwards
Once you have your number, you can work your way backwards.
Say, for example, that your goal is €400,000 and you want to retire at the age of 55.
Your savings are currently at €10,000. If you’re 30 years, you have 25 years to hit your goal.
If we use the average interest rate of 8% of the stock market, you will be able to do the calculations and see that you would need to save and invest €350 per month, for the next 25 years, to reach your goal (the power of compound interest).
This gives you a good number to start with: now you know how much to invest!
(Not sure how to calculate your monthly contributions? Use a compound interest calculator).
Create an investment plan
Now that you know how much you want to save, you’ll want to understand what the best portfolio allocation is and how much you want it to be diversified. Now, in the example above, we used an average return of 8%.
But what if you had a lower return, or a higher one?
Depending on what you invest in, your rate of return will vary. We’ve talked about various asset classes including dividends, cryptocurrencies and stocks. Your annual return will vary depending on the asset class. With P2P investing, you can expect to get even higher returns of 14% and even 16% with our bonus.
With a return of 14%, we can recalculate the numbers to see how much you would need to invest to hit your €400,000 goal.
With 8% return, it’s €350 per month. But with a 14% return, it’s only €30 per month.
But here’s the thing:
Let’s say you’re comfortable investing €350 per month for 25 years.
At 8%, that’s €400,000. At 14%, that’s more than €1.2 million – that’s 3X your original savings target.
Pretty good, right?
Now, we’re not saying your entire portfolio has to be in P2P lending, but it does show that having some exposure to high return assets can help you reach your goals faster.
What if I don’t have a goal?
It’s possible you don’t have a specific goal.
You just want to start investing because you know it’s financially savvy and you want to save for something in the future. In that case, you can follow a rule of thumb of how much to invest in: for example, the 50/30/20 rule says you want to be investing 20% of your income.
Rule of thumbs are not the best since they are not personalised according to your personal needs. That’s why, don’t fret if 20% is too high. Keep decreasing that number by 1%, until you find a number that you’re comfortable with.
No matter what percentage you stick to, it’s important to start as soon as you can. If you just save and don’t invest, your savings will grow a lot more slowly — especially with current interest rates at all time lows. With the magic of compound interest, your savings will grow a lot more quickly over time.
2. Your risk tolerance
But what if you’re not comfortable with investing in risky asset classes and prefer keeping risk to a minimum?
That’s called risk tolerance. It’s important to invest in what you’re comfortable with.
If you’re someone who is prone to worrying and prefers to sleep well at night, then you want to prioritise assets that are low risk. If you’d rather focus on getting high returns with more risk, then you’ll be able to invest in higher risk assets.
Usually investment experts recommend investing in riskier assets when you’re younger, since you have more time to ride out economic downturns. Then, as you get older it makes sense to go into lower risk asset classes since you will be withdrawing.
3. Accessibility
How easy and how much do you need to commit to start investing in your asset class?
This is an important question, because investing in certain assets will require some minimum knowledge, or a commitment of a certain amount of money.
With stocks, for example, you can start investing with several brokers for as low as €10. You might need to do a bit of research on the broker, and — if you plan on picking stocks — on the companies you’ll invest in.
With other asset classes like real estate lending, you will need to commit a large amount and do a lot of research.
With dividend growth investing, you can start small, but you’ll need to do a lot of research.
One of the main benefits of P2P lending is that you can start for as little as €10, and you don’t need to do too much research.
Conclusion
These are the main things you want to consider when you decide how much to invest:
- Your goals
- How much risk you can take on
- How easy it is to start investing in the asset of your choice
If you’re a new investor, you are better off starting small and easy and then going from there.
And as many investment rules will say: it often doesn’t matter how much you invest, just start now!
Ready to invest?