In my work as a financial advisor, one of the most common questions asked is how much should you invest in stocks per month.
While there is no single right answer to the question, there are a couple of things that can help you figure out the ideal sum for your particular situation.
What Do the Experts Say
Whenever there’s something we need to find out, we consult “the experts”. Whoever they may be.
Well, most experts agree that as a general rule, you should be investing around 10 to 20% of your after-tax income.
Some say you should pay off your high-interest debts before investing at all. Others say invest everything you can and worry about debt and everything else later.
So, how can one know which advice to follow?
As it is with so many other investing-related questions, there’s no right answer to this one either. It all depends on your investing goals and financial situation.
Investment Goals
The amount of money you should invest regularly depends on what you want to achieve with your investments. Let’s look at examples of the most common long-term investing goals.
Financial Independence
Being financially independent means having enough money to live your life without needing a job for income. If you wish to achieve financial independence, you need to go heavy on investments and trim your monthly budget to perfection. This usually requires a high income to begin with.
To become financially independent, you need to have around 30 times your annual spending in investments, assuming you withdraw about 3.50% yearly.
For example, if your annual expenses are $50,000, you need to have $1,500,000 in investments. In this scenario, you would withdraw $52,500 (3.50%) yearly to cover your annual expenses.
The beautiful part is that since it’s a stock portfolio, it will most likely have a higher return rate than 3.50%. So, theoretically, you get to live on your investments indefinitely.
Assuming you have no initial investment, you would need to invest around $750 per month for 30 years with a 10% annual return rate. With an 8% annual return rate, the monthly investment would have to be $1,100.
As you can see, small differences in return make a big difference in results.
Early Retirement
Investing for early retirement is pretty much the same as aiming for financial independence. Both involve saving and investing as much money as possible.
The difference is that retiring early involves a lot more moving parts like your retirement plans, work history, the pension you’re going to receive, etc.
The most common rule of early retirement is to have 25 times your annual expenses in savings and investments. This would mean that if you plan to live on a budget of $30,000 per year when you retire, you should have around $750,000 saved.
For example, if you’re 30 years old and would like to retire when you’re 55, you should be saving around $600 per month with a 10% return rate to achieve $750,000 by that time.
This way you can withdraw 4% on the first year when you retire and adjust that 4% according to inflation in subsequent years. The idea is that your investment portfolio should have a return rate of over 4% to make sure you don’t run out of money.
Investing for Wealth Creation
Investing to create wealth is probably the most common reason for investing. So, here we have no specific goal, but we do want to build a portfolio that improves our quality of life.
For the sake of simplicity, let’s assume that your investing horizon is 30 years. How much would you have to invest to create wealth that truly makes a difference in your life?
Let’s be conservative and also assume that you’d have a 7% annual return rate for the 30-year period. If you invest $200 per month, your portfolio will grow to around $235,000 after 30 years. $235,000 would surely make a difference to any normal person.
Financial Situation
No matter what financial goals you may have, the amount you should invest in stocks per month eventually comes down to your financial situation.
The three main factors that define your financial priorities are your income and expense level, the amount of debt you have, and how much savings you have.
Monthly Income Level And Expenses
The very basis for successful long-term investing is that your income should exceed your expenses. If you have no money left over, you have no money to invest, simple as that.
If you want to know how much you should be investing per month, you need to know where your money is coming from and where it’s going. It all comes down to figuring out your net worth, creating a balanced budget, and tracking your monthly expenses as well as your income.
Let’s imagine you have an after-tax income of $2,000 per month. After all your expenses, you’d have a budget surplus of around $100 to $150. Depending on your savings, you could invest everything you have left over, or divide it 50/50 to savings and investments.
There are some famous budgeting models like the 50/30/20 model that can help you with categorizing your expenses.
Debt
If you already have a tight budget and a lot of high-interest debt, it might be best to focus on paying off your debt and creating a balanced budget first.
Considering that the median rate of interest on credit cards was 24.12% on September 2023, your interest payments can take a big chunk out of your budget. Therefore, you should pay off your high-interest debt as soon as possible.
Then again, the longer you postpone your investments, the longer it takes for compounding to kick in.
What you’d want to do is to create a budget and see whether you have any money left over after debt repayments.
If you have a lot of debt and have little or no money left over, you should focus on paying off your debt and minimizing your other expenses.
Then again, if you have some money left over, you can start building an emergency fund and begin investing regularly.
Savings
As we discuss further in the investing vs. saving chapter, you should have savings as well as investments. So, if you haven’t saved anything for a rainy day, I would suggest you go 50/50 on savings and investments.
For example, if you have $100 per month to save or invest, you’d invest $50 and save $50 in your savings account. If you already have some money put aside, you can go ahead and invest more.
The idea here is to separate your savings from your investments. Savings are the money you spend on emergencies; investments are what you use to retire.
As a financial professional, I wouldn’t recommend using your investments as an emergency fund.
Selling your investments to pay for surprising expenses is the most expensive form of money there is. Every time you sell your long-term investments, you destroy whatever compounding there might’ve been, and must start again. Also, you give up all the returns you would’ve made over the years.
Not to mention that the stock market can be a volatile place, and you might be forced to sell your stocks at a loss.
5 Key Things to Remember
- Learn how to create a budget and stick to it.
- Be consistent in your investment strategy and invest in a way that’s sustainable.
- Build an emergency fund so you don’t have to cash in your investments to pay for unexpected expenses.
- Always make at least the minimum payments on your loans.
- Once you’ve paid off your high-interest debt, don’t get into debt again.
Investing vs. Saving
As I mentioned before, we need to make a difference between investing and saving.
Investing is an activity where you strive to get real returns for your capital, whereas saving is merely storing your money. Investing in stocks regularly in the long-term has proven to be the most beneficial of all investment strategies.
The main reason why investing is important is that it helps you maintain and increase the real value of your money. In other words, the return rate you get from investing is higher than the rate of inflation that erodes the purchasing power of your money.
Therefore, the biggest difference between investing and saving is that investing protects your money from inflation, whereas keeping money in your savings account does not.
To really understand the difference, it’s best to divide your money into three categories.
First, there’s the money in your current account that you use for basic expenses. Then there’s the money you have in your emergency savings account, and finally, there are your investments.
The idea of these categories is to point out that the money you have saved in your bank accounts serves as a foundation for your long-term investments.
The ideal situation would be to have a sufficient emergency (2-3 times your monthly expenses) fund to cover all immediate emergencies. This way you can prevent selling your investments to pay for surprising expenses and let your investment compound without interfering.
Can You Invest AND Pay Off Debt
The short answer is yes, you can do both.
The long answer is that it all comes down to your budget and the amount of debt you have.
If you have a lot of debt and are struggling to save, it’s best to focus on paying off your debts before you begin to invest. This way you can slowly start to put more money toward your investments as your amount of debt is reduced.
Then again, if you can make the minimum payments on your loans with ease and have some money left over, there’s no reason why you shouldn’t start investing.
The main thing is that you should at least pay the minimum payments. Some people take repayment holidays on their loans and use the money to invest.
Depending on how much debt you have, it can be a dangerous strategy because debt has a nasty way of getting out of hand. Also, banks usually have a certain limit on how many repayment holidays you can take, so it’s best to save those for real emergencies like unemployment and such.
How Much Do You Need to Invest to Become a Millionaire
A question I’m asked is quite often “Will investing make me a millionaire?”.
This one’s easy because it most certainly can!
Let’s take a historically accurate example of how much you would’ve needed to invest to make you a millionaire.
In this scenario, you would’ve regularly invested in the S&P 500 from 1990 to 2023. During that time, the average inflation-adjusted return per year was 7.40%. To become a millionaire in that time, you would’ve needed to invest $625 per month.
Investing $625 per month for 33 years is not an easy task for most people. Therefore, I’m not saying that everyone who invests regularly can become a millionaire, but I am saying that it’s entirely possible.
This is why it’s important to start investing as early as possible, try to live somewhat frugally, and increase your income as much as possible.
