What to Consider When Deciding Your Investment Amount
Investing is a big deal. It takes careful planning, research, and patience. When deciding an investment amount, follow the below guidelines.
When deciding on an investment amount, one of the first steps you should take is to create a balance sheet showing how much you make and how much you owe. Once you know what your assets and liabilities are, you have your net worth. Use these numbers to determine your position on the points below.
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KEEP YOUR CUSHION
It is always important to have some cash on hand. Experts typically say having the cash equivalent of 3-6 months of your living expenses is a safe bet. You never know what life will throw your way (think new transmission, losing your job, or medical expense) so it is always safe to have short-term plans before investing for the long-term.
MAKE SURE YOU’RE OUT OF DEBT
It is not smart to invest if you are carrying around high-interest-rate debt from things like credit cards. Common interest rates can be up to 25%, and on $5,000 of debt, that costs you $1,250 a year. You are better off tackling this debt first and then focusing on putting any extra money towards an investment later.
THINK ABOUT YOUR AGE
Age is a major factor to consider when deciding an investment amount. Younger investors have more time to reach their goals, so they can afford to invest a bit less than someone older. However, it is always great to get started and take advantage of compounding interest. Younger people also have more short-term goals (like purchasing a house) that may require more cash on hand. On the contrary, an older individual without sufficient retirement savings may want to invest significantly more per month to catch up.
IF YOU CAN’T LOSE IT, DON’T INVEST IT
There is no guarantee when it comes to investing money. This means that if losing $5,000 will break you, you shouldn’t invest that money. It also probably means that you do not have enough money saved as a cushion.
Luckily, real estate never goes to zero! Real estate, like any investment, can go up and down in value, but it never goes to zero. It’s unlike an investment in stocks where a company can go out of business and the stock becomes worthless. Read why real estate is the #1 asset class of the wealthy in our free eBook.
GIVE ME THE MAGIC NUMBER
According to Investopedia, “There is no magic dollar amount that defines how much should be saved or invested, 10% of your net income is a desirable target (but starting at 5% is still admirable).” These percentages should only be considered, however, if you already have your debt paid down and have a solid cushion of cash saved for emergencies.
Remember to always consult your personal investment or tax advisors before making any financial or investment amount decisions you are unsure of.
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