How much should you invest?

Triston Martin Updated on Aug 02, 2022

Your goals should determine how much you decide to invest each year, regardless of how much you make. You can set your investment goals to help you reach your goal and motivate yourself to keep following through with your investment plan. You should also consider how much money you have to invest in setting your investment goals. You may not be able to invest as much initially if your income is $50,000. However, if you keep your eyes on your goals, you can increase your investment portfolio as your income grows. Following these four steps, you can establish a plan to achieve your financial goals. This example shows a 30-year-old earning $50,000 annually with an expected increase of 4% yearly.

Set Your Goals

You may have several goals by turning 30, such as starting a family, having kids, completing college, and retiring on time. With a $50,000 income, this is quite a lot. Your income will likely rise over time, so don't let your current income limit your ability to achieve your goals. When creating your investment plan, it is important to choose your goals and target them separately. As an example, let's say you want to retire at 65.

This indicates that you will need $1 million in the capital. This is your goal. You will need to save $500 each month, starting at age 30, if you use a savings calculator and assume a 6.5% average annual return. This is your savings goal. Next, create a spending plan to help you reach this goal.

Make a Spending Plan

Many people make the mistake of calculating their savings amounts around monthly expenses. This means that they only save what is left after expenses. This results in sporadic investing plans, which can mean that there is no money available to invest when expenses are high. If you are determined to achieve your goals, it is possible to reverse this process and plan your monthly expenses around them. This amount will be your first expense if your savings goal is $500. This is particularly easy if you have an automatic deduction from your paycheck to fund a qualified retirement plan. This will force you to manage your monthly expenses with $500 less.

You Can Lock In a Percentage of Your Income

Financial planners recommend saving 10% to 15% of your annual income. Saving $500 monthly is equivalent to 12% of your annual income. This amount is appropriate for your income level. If your income rises by an average of 4 percent per year, it will automatically increase your savings by 4%. Your annual savings amount will grow from $6,000 per annum to $8,540 per annum in 10 years. Your annual savings will rise to $16,000 by turning 55. You can reach your $1 million goal by 65, assuming you have a $50,000 yearly income.

Invest According To Your Risk Profile

Based on the stock market's historical returns over 100 years, this investment plan assumes an annual average rate of return of 6.5%. This plan assumes a moderate level of investment with large-cap stocks. You will need to reduce your expected rate of return if you are concerned about risk or want to invest in stocks that are more volatile than stocks. This will mean you have to increase the amount you spend.

You have a longer life expectancy, so you can take on more risks to increase your chances of achieving higher returns. As you approach your retirement goal, you may want to decrease volatility by increasing fixed-income investments. You can keep your eyes on the 6.5% average annual return benchmark, and you will be able to build a portfolio that matches your changing risk profile. This will allow you to maintain an equal monthly investment amount.