After receiving your paycheck and taking care of your bills, it’s tempting to spend the remaining cash on dining out with friends, vacations, or shopping for new clothes. However, investing your money now can have a significant impact in the long run, making dreams like owning a home and retiring comfortably a reality.
The advantages of investing vary based on factors such as age, income, market conditions, and more. Our return on investment calculator demonstrates that investing just $100 per month for 30 years at a 7 percent rate of return could result in a portfolio of nearly $98,000, even after considering taxes and inflation. With the historical average annual return of the S&P 500 standing at around 10 percent, it’s clear that consistent investing can lead to wealth accumulation over time.
Determining how much to invest each month while ensuring you have enough for essentials and enjoyment can be challenging. Financial advisors suggest ensuring you have sufficient cash for short-term needs and aligning your investment strategy with your goals and risk tolerance.
Covering the basics
Prior to initiating investments, it is crucial to establish a fully funded emergency fund and eliminate high-interest debt.
Financial experts typically recommend building an emergency fund that can cover three to six months of expenses to provide a safety net in case of unexpected events like job loss or unforeseen medical bills. This fund should be easily accessible, such as in a high-yield savings account. Additionally, it’s important to assess your debt obligations, prioritizing the repayment of high-interest debts like credit card balances before increasing investments.
When it comes to investing, there are no universal rules. For instance, individuals with an employer match through their 401(k) should aim to contribute enough to maximize that benefit while also focusing on building their emergency fund, according to financial advisor Brian Matthews.
Outlining your goals
A fundamental aspect of any financial plan is defining what you want to achieve with your money, including determining the amount to invest. While retirement may be the ultimate objective for many individuals, there are likely other financial goals such as saving for a child’s education, a downpayment on a home, a vacation, or a wedding.
If your goal or impending expense is less than five years away, it is advisable to place that money in a conservative investment vehicle like a high-yield savings account, as recommended by wealth manager Dan Perrino.
Furthermore, it’s essential to assess your risk tolerance honestly. How would you react if your portfolio decreased by 25 percent in a year? If you anticipate panicking and selling, it might be prudent to increase your allocation to more stable investments like bonds, particularly as retirement approaches.
Calculating your savings capacity
Since all financial planning revolves around your goals, determine how much you need to save regularly to achieve those milestones. Advisors typically gather information such as your current age, desired retirement age, expected retirement lifestyle expenses, and inflation considerations to establish your savings capacity.
Various free calculators, including Bankrate’s retirement calculator, can assist in planning for your financial future. Matthews suggests that maintaining your current standard of living in retirement often entails saving around 15-20 percent of your income, including contributions to a 401(k) or similar retirement plan.
While this may not be feasible for everyone, especially young professionals starting their careers, Matthews recommends initiating savings at a minimum of 10 percent and progressively increasing this amount over time. If you are contemplating investments outside of a retirement account, deduct your bills and short-term savings from your paycheck and allocate the remainder towards investments.
If you are already investing monthly, utilize an online calculator to determine if adjustments are necessary to meet your goals, potentially requiring modifications to your spending habits.
“Budgeting is akin to your bloodstream,” Matthews states. “It is the primary method through which you can achieve all your objectives.”
Final thoughts
Consistent monthly investments can pave the way towards achieving your financial aspirations, whether it’s retirement, homeownership, or other life milestones. Begin by establishing an emergency fund and repaying high-interest debts to create a solid financial foundation, then consider your risk tolerance, short-term objectives, and long-term goals when determining your monthly investment amount. Remember that even starting with a small percentage of your income and gradually increasing your investments can lead to substantial wealth accumulation over time.