Investing money can help you to build wealth. The sooner you start investing, the more time you have to benefit from compounding interest. So, how much should you invest per month? It’s not a simple question as you have to consider your income, goals and risk tolerance. Talking to a financial advisor can help you find the right answer for you but here’s how you can start thinking through it.
Investing Money vs. Saving It
When you invest money, you’re putting it into the market. For example, you might invest in stocks, exchange-traded funds, bonds or cryptocurrency. The rate of return you earn depends on how well your investments perform. When you save money, you’re typically depositing it into a savings account, money market account or CD account. You can earn interest on your money with minimal risk.
Which is better, saving or investing?
Saving is safe since it’s very difficult to lose money in a savings account. On the other hand, you may not earn a lot of interest on deposits. Online banks can offer high-yield savings accounts with competitive rates, but they can still lag behind the stock market’s performance.
Investing is riskier but there’s a greater possibility of earning a better return for your money. Compounding allows you to earn interest on your interest, which can help you to grow your money faster over time.
How Much Should I Invest Per Month for Retirement?
Financial experts generally recommend that you save and invest 10% to 15% of your income for retirement each month. However, whether you need to invest more or less than that can depend on several factors, including:
- How old you are
- What age do you plan to retire
- Your annual income
- Where you’re investing for retirement (i.e., 401(k), IRA, etc.)
- Whether you’re getting any type of matching retirement contributions
- How much money do you expect to need for retirement
For example, let’s assume that you’re 27 years old and plan to retire at 67. You have 40 years to invest and you’ve set a $1.5 million savings goal. You make $65,000 a year after taxes.
To reach your goal, you’d need to invest $900 per month or 17% of your income. These numbers assume you’re single and they don’t factor in any retirement income you might draw from Social Security. Getting married or getting a raise could affect your calculations.
Now, let’s say you’re 37 years old with the same savings goal and annual income. You’d have to invest nearly $1,700 per month or 31% of your income to reach $1.5 million in savings by age 67. That’s a big difference as a result of waiting to get started with investing.
Having to invest that much could make it more difficult to reach other goals like buying a home or putting money into a 529 college savings account for your kids. That’s why it can be helpful to use a retirement savings calculator to estimate how much you might need to save based on your unique situation.
How Much Should I Invest Per Month If I Have Debt?
Should you invest or pay off debt? It’s a question that’s asked often and there’s no right or wrong answer.
It’s easy to make a case for paying off debt first, since doing so could free up more money that you could invest later. If student loan payments are eating up a lot of your budget, for example, you might want to get rid of those payments as quickly as possible. And paying off credit card debt ASAP could save you a lot of money in interest if your card has a steep APR.
However, delaying investing can mean having to play catch up later as the previous example shows. If possible, it may be best to try and balance both financial goals so that you’re not in the hole when it comes to retirement savings later.
Going back to the first example, let’s say you split the difference and invest $450 per month for retirement from age 27 to age 35. During that eight-year stretch, you use the other $450 to accelerate your debt payoff.
You also accumulate $100,000 in your 401(k) in that period, thanks to steady contributions, solid returns and a good employer match. From age 35 to age 67, you’d need to invest just over $1,000 per month or 20% of your income to reach your $1.5 million savings goal.
This example illustrates how you can accomplish both goals—investing and debt repayment—if you have a plan that’s tailored to your situation.
How Much Should I Invest Per Month to Retire Early?
Early retirement generally means retiring any time before the typical age range of 65 to 67. How much you need to invest per month to retire early can depend on when you plan to retire and how long you need that money to last.
So, here’s another example. Say that you’re 27 and you want to retire at 47. You know how 20 years to invest versus 40 and that money needs to last you until age 87. With that in mind, you’ve increased your retirement goal to $2 million.
To reach that goal, based on an annual income of $65,000, you’d need to invest 70% of what you make. Now, is that realistic? Probably not, at least not without some tweaking of your plan. You may need to drastically cut expenses or find ways to make more money.
Creating a Monthly Investment Plan
If you’re ready to start investing or fine-tune your existing investment strategy, here are a few tips that can help.
- Review your budget to see how much money you currently have to invest each month.
- Go over your expenses to see if there’s anything you can cut to free up more money for investing.
- Review your workplace retirement contribution plans if you have a 401(k) or similar plan.
- Consider adjusting your 401(k) contributions if you’re not getting the full employer match offered.
- Set your 401(k) contributions to increase by one to two percentage points annually to coincide with your yearly raise.
- Open a traditional or Roth IRA at a brokerage and set up a recurring monthly direct deposit.
- Consider supplementing your 401(k) and IRA with deposits into a taxable brokerage account.
You may also want to review your investment plan monthly or quarterly to see how well your investments are performing and what you’re paying in fees. You can schedule reviews to coincide with budget reviews, which can be an opportunity to look for additional money to invest.
The Bottom Line
How much should I invest per month? It’s a personal question that requires a personal answer since everyone’s financial situation is different. Understanding where you’re starting from and where you hope to go can help you create an investment plan that fits your needs and budget.
- Consider talking to your financial advisor about the best way to divide up your investment dollars if you only have a limited amount of money to work with each month. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matchesyou with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When deciding where to invest, remember that there’s a difference between tax-advantaged and taxable accounts. Tax-advantaged accounts, such as a 401(k) or traditional IRA, allow for tax-deductible contributions. A Roth IRA lets you make qualified withdrawals tax-free when you retire. Taxable accounts are subject to capital gains when you sell investments for more than what you paid for them. Managing your tax liability with investments is important for preserving as much of your returns as possible.
Photo credit: ©iStock.com/fizkes, ©iStock.com/ArLawKa AungTun, ©iStock.com/Pekic
As an investment expert with extensive knowledge in financial planning and wealth building, I can assure you that the concepts discussed in the article are rooted in sound financial principles. Let's break down the key concepts and provide additional insights:
1. Investing Money vs. Saving It:
- Investing involves putting money into various assets like stocks, ETFs, bonds, or cryptocurrencies, with the returns depending on market performance.
- Saving typically means depositing money into safer options like savings accounts, money market accounts, or CDs, where interest can be earned with minimal risk.
2. Saving vs. Investing - Which is Better:
- Saving is considered safer, with minimal risk of losing money, but it may offer lower returns.
- Investing is riskier but has the potential for higher returns through compounding interest over time.
3. How Much to Invest for Retirement:
- Financial experts recommend saving and investing 10% to 15% of income for retirement each month.
- Factors influencing the amount include age, planned retirement age, annual income, retirement account type (401(k), IRA), and expected retirement expenses.
4. Impact of Age on Investment Amounts:
- Starting early allows for smaller monthly contributions due to compounding.
- Waiting to start investing may require larger monthly contributions to reach the same retirement goal.
5. Investing with Debt:
- The decision to invest or pay off debt depends on individual circumstances.
- Balancing both goals is advisable; a tailored plan can involve allocating funds for both debt repayment and investing.
6. Retiring Early and Monthly Investment Needs:
- Early retirement requires more aggressive saving, potentially reaching higher percentages of income.
- Realistic goals should consider lifestyle changes, expense reduction, or additional income sources.
7. Creating a Monthly Investment Plan:
- Review current budget to determine available monthly investment funds.
- Identify potential expense cuts to allocate more funds for investing.
- Optimize workplace retirement contributions and consider incremental increases.
- Utilize tax-advantaged accounts like 401(k) or IRA.
- Regularly review investments and adjust the plan based on performance.
8. The Bottom Line:
- The amount to invest per month is a personal decision based on individual financial situations and goals.
- Understanding one's starting point and future objectives helps in creating a tailored investment plan.
9. Investing Tips:
- Consult a financial advisor to optimize investment allocations and receive personalized guidance.
- Differentiate between tax-advantaged and taxable accounts based on individual tax implications.
- Periodically review investments and fees to ensure alignment with financial objectives.
In conclusion, the article provides a comprehensive overview of the considerations involved in determining how much to invest per month, emphasizing the importance of individualized plans based on personal financial circumstances and goals.