How much should you invest? Well, how much have you got? Seriously. You should invest as much as you possibly can.
Of course, most of your budget probably goes to covering basic expenses, like housing, transportation and food. But some should be allocated to goals, like building up an emergency fund, buying a home and retiring one day. In an ideal budget, that savings portion should be at least 20 percent of your take-home pay. And of that, whatever amount you won't need for at least a few years is what you should invest.
But who actually has an ideal budget? If saving 20 percent doesn't work for you now, start by putting away as much as you can. Shoot to set aside at least $1,000 for your starter emergency fund—that’s likely enough to cover a common unexpected expense like a car repair or cavity. Once you've done that, divvy up the rest of what you can afford to set aside (no matter how small), putting money into a tax-advantaged account like a 401(k) or IRA for retirement and a regular brokerage account for goals you want to reach before you’re 59 ½.
You might think it isn't worth investing if you’re only putting $50 or $100 a month away, but getting started with any amount now can pay off later. For one thing, you'll get in the habit, which makes it easier to increase your savings rate as your income grows.
But consider this, too: If you set aside $100 today, plus another $100 every month, with an interest rate of 1 percent compounded monthly—pretty much what you could expect from a savings account these days (if that)—you wind up with more than $59,000 after 40 years. Not bad.
Much better? In the same timeframe, at a rate of 6 percent, which you can get when investing for the long term, you’ll have more than $200,000. Sure, that’s not enough to retire on, but remember that’s based on setting aside less than $25 a week—proof that whatever you can afford to invest today can eventually grow into an impressive sum.
August 23, 2017