How much do you need to invest? What if I said you could start investing with very little?
Before investing, you need to make sure you have financial goals and understand risk and return. Now that you know what sort of low risk and high risk investments there are, you know what suits you best. It is very important that you stick to the investment strategy that suits you best. Now having done all this, you still need to consider how much you can actually invest.
Lots of people think that investing requires huge sums of money (think upwards of $10,000). You don’t need that much money to start investing. In fact, you can still with as little as $100. With $100 you can at the very least:
Start investing by opening up some bank accounts
Having multiple bank accounts for different purposes is the easiest and best investment you can make to start. Lots of budgeting experts like The Barefoot Investor, Frances Cook and Mr. Money Mustache talk about using multiple bank accounts for different things. If you are looking to start investing, you will want at least four bank accounts:
- Daily spending and earnings – your salary gets paid into this account. You also spend money on necessities (rent, grocery, power, etc.) from this account
- An emergency funds account – you should have at least 4 to 6 months’ worth of expenses stored in this account.
- A ‘luxury’ spending account – money that you have saved up for ‘luxury’ items like travelling, boardgames, fancy dinners and hobbies
- An investment account – money that you are stockpiling to save up for your financial goals (this should be a savings account).
The emergency funds account is most important here. It is your insurance policy if things go south. Whatever money you have lying around, you will want to put into here until you hit that 4 to 6 month’s worth of expenses stored away. This should be a savings account as well.
Once you have that emergency fund, you can start building your investment plan. Everytime you get paid (or take drawings if you are a business owner), 20% can go to luxury spending and another 20% can go to the investment account. If you can live with less luxury, feel free to put 10% into luxury and 30% into investments. You could go all 40% into investment and nothing into luxury, but life will be a lot less fun! If you are a (reasonably) high earner – you can put 50% into the investment account to supercharge your savings!
Let’s say you’ve built up a decent amount over time (say $1,000) what happens next?
Review your financial goals
We’re going to keep coming back to this. Financial goals are the backbone of all your investments. Let’s take a look at some examples of common financial goals:
First home ownership
So the idea is that you want to save up money for your first home deposit. This can take a while. If you’re going for a 10% deposit on a $700,000 loan, you’ll need $70,000. If you’re living on $40,000 a year (after taxes) and saving 50% of that ($20,000 a year – about $1,660 a month) it’ll take you about 42 months (3 years and 6 months) to get there. 3 years is not a long time (in terms of investing). But at the same time, letting your money sit in a savings account for 3 years means that it is losing value over time.
Once you’ve got your first solid $1,000, it’s time to look at some low risk investments to help you along your way.
For example, you could put $1,000 into a term investment that earns 5% per year. By next year, it will be $1,050. If you are saving $1,660 a month, you can even build up to $5,000 and then put it into a term investment and get more returns. The idea here is that as soon as you have a substantial amount of money in your investment account – you want to invest it!
To keep it simple, let’s say you do the following:
- First year – invest $20,000
- Second year – invest $20,000
- Third year – Save $20,000
By the third year, the first year investment would turned to $22,050 at 5% per year.
The Second year investment would be $21,000 at 5% per year.
In total you would have $22,050 + $21,000 + $20,000 = $63,050 to invest in your first home deposit. You are $3,050 (almost two months’ worth of savings) closer to your goal than you would be if you didn’t invest the money. This is even without compounding the returns.
Retirement planning
Retirement planning is trickier – since everyone has a different idea of what retirement looks like. Also, everyone has a different retirement age. For simplicity, I’ll assume that most people reading this blog are looking to retire in between 20 to 30 year’s time. This gives us a nice long time frame in which to invest our money.
I’m going to be real simple here:
Yup, you heard me:
Seriously, click the link and learn more about INDEX FUNDS
Ok, let’s wind it back a bit. I’m not saying you should put ALL your savings into index funds. Index funds should feature as part of your retirement investment portfolio. This portfolio can include property, individual shares and other investments (even crypto if that works for you). But index funds are arguably the safest long-term investment that is ‘guaranteed’ to give you more than what you put in.
You don’t even need much to get started in an index fund. If you have 20 years to go till retirement – find a high growth fund, have a direct debit going from your investment account to your chosen fund of say $200 to $1,000 a month (depending on how much you can afford) and as you get closer to retirement, switch to lower growth funds to secure your investment.
Of course I’m over-simplifying things. But I’m using these examples mainly to show that you don’t need a lot of money to start investing.
How much do you need to start investing?
Next to nothing really.
Don’t use your lack of savings to not start investing. In fact if you don’t have savings, now is the time to think about saving. You can start off simple, putting away 20% of your earnings into a savings account (the most basic investment) and work your way up from there.
Once you have a decent chunk of savings, you can start investing in bigger things, like term investments and shares.
The key point here is: Don’t be scared of investing! Educate yourself and achieve your financial goals.
Hoarding cash = bad!
Investing money = good!
Make your money work for you!