Trying to achieve a comfortable financial future will depend upon investing in a portfolio of assets today. We all know that we need to save and invest, but how do you know if you’re investing enough today to meet your financial goals in the future? The amount of income you should invest will depend on your own unique goals, financial situation, and risk tolerance. Review each of these considerations to determine what is the right amount for you.
What are your goals?
How much of your income you should invest depends heavily on your long-term goals. Are you aggressively pursuing wealth growth and early retirement, nearing the end of your full-time working years, or are you saving up for a house or some other major purchase? The more aggressively you pursue long-term wealth growth, the more of your money you will want to invest. Putting your money to work for you is the surest way to build your net worth and create income streams.
Depending on how aggressive you are, it could mean investing 20% or more of your income. However, if your current goal is to make a large purchase in the short term (1-2 years), such as a house, or if you need to take some time to build an emergency cash cushion, then scaling back on putting your money into potentially volatile assets will make sense for you. Be aware that a well-built portfolio of stocks can fluctuate significantly over a few months, but generally returns upward value over the course of many years (10+).
Given this volatility, for times where you might save aggressively, you may consider holding off on investing until you have reached your savings goal. Deciding on the investment and savings allocation that is right for you is important. It’s a good idea to have a financial advisor at your side when trying to determine what your goals are, and what it’s going to take to get there.
What is your financial situation?
Getting a comprehensive assessment of your current financial situation will go a long way to determining how much of your income you can afford to invest. The first step will be to have an updated and comprehensive budget in place so that you can determine how much free cash you have at the end of every month. You can only invest what you can afford to invest so a deep understanding of your budget is important.
High-interest debt, like credit card debt, will have to be considered an important priority to pay down aggressively or completely, because the interest rate charges can be so high they may outweigh any progress you will make in your investments. You’ll also want to make sure that you have an emergency cash fund that is safe (little risk of losing value) and can be drawn on quickly (within days) and easily (few transactions). A good starting emergency fund should be able to provide for three months of your budgeted costs. With a strong financial situation in place, you’ll be able to start investing confidently. The more stable your financial situation, the more money you can afford to invest.
What is your risk tolerance?
Another aspect to consider is your tolerance for risk. Even with the simplest of financial assets such as stocks and bonds, there is the risk of market volatility. In years, months and sometimes days, any asset can wildly fluctuate between gains and losses. Do you have the emotional stability to watch your portfolio lose half its value in months, and then the patience to allow it to appreciate its previous value and beyond? It’s important that whatever investment strategy you choose, that it is something you can stick to over the long term. If you don’t like volatility, then investing heavily in equities (70% or more) is not for you. You may want to consider investing less of your income in equities and build a portfolio that has more bonds and other more price stable assets to reduce volatility. Knowing your risk tolerance can make you more likely to stick to your investment plan.
Trust Point can help you!
Determining your goals, assessing your finances, and gauging your risk tolerance can be a large and difficult task. Putting it all together into a comprehensive plan that is customized to you, is key to figuring out how much of your income you should invest. Having a certified financial professional at your side during this process can give you the peace of mind that you’ve considered all the factors and have a roadmap for success. Contract Trust Point today, and we’ll help you get started!