From ETFs to stock options, navigating the world of investing isn’t a walk in the park. Sure, we hear a lot about investing on the internet or TV. Lucky investors striking gold, netting 1,000% returns, and gaining hundreds of thousands of pounds. That’s not the reality for your everyday, novice investor, but it certainly isn’t impossible.
Most financial professionals recommend investing between 10-20% of your annual salary. Before you start investing, you should have enough money to cover living expenses for three to six months. After you have that money set aside, you should look at your historical spending and determine if you have money to allocate to investing.
Investing isn’t a game of luck or chance. The truth is, investing is a strategic effort that requires proper due diligence and industry knowledge. Many new investors make their first trades under the guidance of a mentor or a financial advisor. Before diving in headfirst, you need your finances in check. You wouldn’t want to make a bad trade and lose your rent money, would you?
Save Enough to Cover Your Necessities First
Before you start investing, you need to make sure you have enough survival money in case life takes a turn south.
How Much You Need to Cover Your Necessities
The general rule of thumb is that you should have three to six months of savings stowed away in an easily accessible account. These funds should cover your monthly expenses – food, utilities, and rent.
Consider Your Goals Outside of Investing
Don’t forget to remember your near-term goals. Is Christmas just a few months away? You may need more spending money for presents. Planning a trip to Iceland? You better make sure you have money on hand without needing to deplete your emergency funds.
At What Age Should You Start Investing?
Just like life, investing isn’t black and white. You won’t lead a life of financial misery if you aren’t investing by the age of 18. But because of the time value of money, it’s better to start investing sooner than later. Time is quite literally money, unless you make poor investment choices, that is.
Whether you’re 18 or 38, there’s never a point where it’s too early or too late to start investing. We hate talking about retirement especially when we’re young. Twenty-something-year-olds entering the job market don’t even want to think about getting old (can you blame them?).
Even though it’s an off-putting topic to some, it’s a good idea to start planning for your retirement when you’re young. Setting retirement goals will ultimately determine when and how much you need to invest. And the “how much” piece of the planning is not at one point in time, it’s over your entire career!
How to Determine When It’s Time to Start Investing
As mentioned above, do not throw money into investments until you have enough money to cover your necessities. You also want to pay off high-interest debt (such as credit card debt). Prioritising investing before paying off high-interest debt is a ludicrous idea. Since many credit cards have an APR of 20%, your debt can grow faster than your investments! Counterintuitive, right?
You Can Start Investing at Any Age
So, let’s make it clear – there’s no set age to start investing, but you do want to make sure you’re in good financial standing beforehand. And depending on your age (especially if you’re under 18), you may need a hand from your parents.
Consider how much money you want to have by the time you retire (excluding your pension). There are various free calculators online that will give you an idea of when you need to start saving, and how much you need to save to reach that goal.
How Do I Know How Much I Need to Retire?
To comfortably retire in the United Kingdom, you need 20 to 25 times your annual retirement expenses. Those who can live a frugal life with £40,000 per year in expenses would need a minimum of £800,000 to retire. This £800,000 includes money in investments, your pension pot, and savings.
Now, if you enjoy the finer things in life, you may need 30 to 35 times your annual retirement expenses. And don’t forget, no one can predict the inflationary levels in 40 years. The more you can save now for retirement, the better.
Another Look at the When: Timing Your Investments Right
The question of “when?” is open to interpretation. You might wonder at what age you should start investing or when you should buy into an investment.
Stocks
Take a stock, for example. You can’t predict the market, but you can use a few metrics to help you determine when to buy the stock of a company. Many analysts recommend buying a stock when it’s undervalued.
I’ve been over how to identify an undervalued stock in my article ‘Buying Stock When It’s Low – Should You Really Do It?‘ so if you wanted to find out how, I’d definitely recommend checking it out.
Index Funds
Say you want to put money into the FTSE 100, instead. The FTSE 100 is an index fund consisting of the top 100 companies in the United Kingdom based on market capitalisation. If you’re investing as part of a long-term strategy, there isn’t always an ideal time to invest in the FTSE 100. Nonetheless, you may want to avoid buying into an index fund during a bullish market – when stock prices are increasing across various industries.
How Much You Should Invest
Investing is a balancing act, especially when you’re not loaded and have heaps of bills to pay. Sure, you can make more by investing more, but you can also lose it all, too. Most investors live by the words “never invest more than you can afford to lose.” That’s why it’s so important to put away money for a few months of living expenses, should the market take a total hit.
Consider Your Monthly Budget
Before venturing into the markets, carefully analyse your monthly spending habits. This is as simple as sifting through a few prior month bank statements. Look at how much money you have left over after paying bills, buying food, and splurging on entertainment (for those that can afford that luxury).
If you’re living paycheck-to-paycheck, it doesn’t make sense to invest until you either reduce your spending or increase your income. If you do have money over, great. It’s likely going into a low-interest savings account. With a few smart investments, you could see a much higher return.
How Much You Should Invest (in GBP)
Most financial professionals suggest investing between 10-20% of your annual income. So, if you’re making £80,000 per year, the most you should look to invest is £16,000. As you veer closer to retirement, it’s probably a smart idea to either invest less of your salary or choose more conservative investments. Younger professionals can choose riskier investments because it’s easier for them to recoup any lost funds as they are much further away from retirement.
Why Should You Only Invest 10-20% of Your Salary?
Unless you earn an incredibly high salary, you can probably only afford to invest up to 20% of your earnings. Let’s break the maximum amount of your salary you should allocate towards certain expenses.
- Rent: 25%
- Utilities: 5%
- Food: 15%
- Transportation: 15%
- Clothing: 5%
- Personal: 10%
- Spending buffer: 5%
Total non-investment expense allocations: 80%
So, if you end up aggressively investing more than 20% of your salary each month, you will not have enough money to cover your other expenses.
Summary
Deciding how much to invest and when to invest is heavily dependent on your financial situation. There’s no set-in-stone age; some people start investing much earlier in life and some don’t start until they are closer to retirement age. Before investing, make sure to consider these key tips:
- Never invest more than you can afford to lose;
- You should invest between 10 to 20% of your salary;
- Set aside an emergency fund that can cover three to six months of living costs;
- Make sure you can fit investing into your budget before starting; and
- Perform due diligence before making your first investments.