Let’s say you’ve got your savings in good shape, built up a secure buffer, and saved for those bigger goals. Nice. The next question you should be asking yourself is – “how much should you be putting into investments?”. Investing can help grow your money over time and when compared to saving, the returns can be much higher. Before you start looking at providers or portfolios, you’ll need to have your answer to ‘the investment equation’ ready. Here’s our top five things to consider:
1. How much money do you have available right now?
Your investments are considered long term and what you put in today, you shouldn’t expect to see again for five years at the earliest. So, it’s important to know how much you have in your starting pot. You could invest it all in one go, or slowly over time. But more on that later…
2. How much additional money will you have available each month?
If you had to put another chunk of cash away – but this time from your monthly income – how much could you afford to save or invest? It’s worth being conservative in your assessment: keeping this realistic and consistent is one of the best ways to grow your money over time.
3. What’s your saving or investing goal?
Do you have a target amount? Or aspiring for something else? Be clear about what your goal is and why. It’s good to keep you focussed on the reason that you started investing in the first place.
Don’t worry if you don’t have a set aim right now; building up smallish annual gains into something rather impressive is a noble goal in itself.
4. What’s your time horizon?
Five years is a good minimum when it comes to saving or investing. If you’re in more of a hurry – perhaps because you’re saving towards a house deposit and you plan to buy sooner – it’s worth bearing in mind that this may impact the level of risk you may be willing to take. On the other hand, if you’re putting money aside for the long term, then you may want to take more risk now – since there’s lots more time to make up for any short-term losses.
5. How much risk can you handle?
Higher risk can potentially bring higher rewards – but it also opens the door to higher potential losses. Even if you’re investing over the long term, if the idea of high risk turns your stomach, you’re perfectly entitled to seek safer havens. After all, you don’t want to find yourself selling off your investments in a panic if they drop by more than you were prepared for.
Once you’ve answered these questions, you’ll be able to understand how much you can invest or save, helping you make more informed and empowered choices about which approaches and providers might suit you best.
An important point to remember is that the questions are interlinked – they all impact one another. However, you don’t need to have an answer to them all – often, the remaining questions will answer themselves.
How to invest it
Once you’re happy you know how much money you’ve got ready to invest – and once the investment equation has helped you set and refine your expectations – it’s time to get started.
All at once
Investing your money in one go can come with some positives, after all, money sitting in a bank account is less likely to grow at the same rate as the value of stocksStocks, also known as shares or equities, represent units of ownership in a company. over the long term. It may also benefit investors with a longer time horizon, who are more likely to have time to recover from any temporary downward market dips.
Another potential benefit of investing all at once is lower transaction fees. Depending on the provider, you may have to pay both a fixed fee and a percentage of the amount you’re investing on each occasion. Investing a large chunk at once may therefore lower your overall fees. Check out the Moneybox investing fees here.
However, timing the market is impossible. You might buy at a low point – otherwise known as “buy the dip” – and potentially lock-in a higher future profit as the market returns. But you might equally pile in right before a major drop in prices – and spend an uncomfortable period seeing your investment in the red. Remember, even the pros find it hard to “time the market”…
Spread over time
If you’re new to investing then you may understandably find the idea of investing a large sum of money in one fell swoop rather daunting. To help with this, some investors employ a technique called “pound-cost averaging”. This involves committing to invest a fixed amount over a regular time-frame (e.g. monthly). After a period of time – say 18 months – you’ll have invested all the money you planned to, having essentially paid the “average” price of your chosen investments over that time. Learn more about pound-cost averaging here.
One benefit here is that you inherently purchase more when the prices go down and less when the prices go up, given that you’re investing the same amount each month. For example; £100 invested in stocks priced at £10 each will buy more stocks than £100 invested in stocks priced at £15. This approach might work for anyone who wants to limit the initial risk of timely investment buying.
On the downside, while you’re waiting to invest the rest of your money, it’s not earning much of a return – nor is it benefiting from the all-important compounding effect, lowering your potential future gains.
Of course, you don’t need to live or die by the initial approach you choose here. You can invest a larger amount upfront and then continue adding to it at regular intervals over time.
If that’s given you something to think about and you’re now ready to explore investing, check out what you can invest in with Moneybox. We’ve got 20 of the biggest US stocks, as well as fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly. for artificial intelligence, gold, the S&P 500A stock market index that tracks the performance of the 500 largest companies listed on US stock exchanges., clean energy, and more. What’s more – you can explore these investments without needing to open an account, so you can see if we’ve got something for you without any risk.
Capital at risk. All investing should be long term. The value of your investments can go up and down, and you may get back less than you invest.