I get this question all the time. Unfortunately, it’s not easy to answer without knowing more about your specific situation.
The amount of money you need to start investing varies significantly from person to person. You need to evaluate your situation, preferences, and goals to figure it out.
The following are factors that I take into account when I’m helping someone get started. None of these are isolated. They need to be considered altogether.
Factors To Consider
Your Age or Timeline
How old you are can be an easy way to gage how much money you’ll need to to put into an investment account. Most people are shooting for retirement around the age of 60 to 65.
If you’re relatively young, you have time on your side, so you can start with just a few hundred dollars. Then make additional contributions when you can to grow your asset holdings and passive income stream.
If you’re closer to 60, you have less time for growth because you’ll need/want to start pulling money out. In order to have a healthy income stream at this age, you’ll need a larger amount of money.
However, if you don’t want to wait until your 60s to reach financial freedom, you need to invest more more money. You’ll also need to be more active and intentional with your investment strategy.
Your Financial Goals
Your retirement lifestyle wants/needs have a big impact on how much money you need to get started. People who need less monthly income don’t need to invest as much money.
If you expect to have debt, a mortgage, car loan, or expensive hobbies when you’re in retirement, you’ll need a bigger principle or more time to compound.
This may seem obvious, and it is, but the amount that you need in your account is significantly different when you’re income investing compared to other strategies.
Other Investing Strategies
Most investing approaches focus on having as much money as possible in your account at retirement. You lower risk and volatility the closer you get, so the value of your account stabilizes.
Then you draw on that sum each year and hope you don’t live longer than you budgeted for.
Income Investing Strategy
When you’re income investing, the value of your account doesn’t actually matter. Your account assets generate recurring monthly dividends and interest.
So if you withdraw less than you’re earning, you never reduce your holdings. This makes it much easier to calculate and reach your financial goals. And you never have to worry about how long you’ll live.
Here’s a simplified comparison for how much you might need in your account using the the two different methods, if you want to reach a $3,900 monthly income goal.
Notice how the income investing portfolio on the left has relatively low risk and a reasonable APY. You can see that you’ll need a lot more money using a strategy that focuses on the final value of your account.
Which Assets You Hold
If you’re only willing to invest in CDs or bonds because you have an aversion to stocks, you’re going to need a lot more money. I encourage you to keep an open mind when it comes to different assets until you understand them better.
Because income investing focuses on dividend and interest payouts, you have to pay attention to the cost per share. One strategy to reduce the needed size of your account is to choose low-cost assets over larger ones.
If you have $1000, you can either buy
- 10 shares of a $100 stock that pays $1 per share OR
- 500 shares of a $2 stock that pays $0.10 per share
I don’t know about you, but I’d rather have $50/month than only $10/month if all other asset factors are equal.
Yes this is awesome and we’ll utilize this strategy when it’s appropriate, but don’t dump big bucks into just one asset. That’s risky AF when you have a lot to lose.
I want to help you keep your money. And the best way to do that in the long run is creating a well diversified portfolio that hedges your risk.
Risk Tolerance
Your risk tolerance factors into determining how much you need in your account. Generally, the lower risk assets don’t yield as much as those of higher risk.
If you’re really uncomfortable with risk, you’ll either need to invest more money or allow for a longer timeframe so compounding can get you to your goals.
Portfolio diversification and a good allocation strategy can boost your earnings while keeping risk manageable. Here’s a chart I put together for 4 different risk portfolios and their corresponding monthly income based on their APY.
How Often You Plan To Add Or Withdraw — And When
Income investing strategies work best when you reinvest your earnings and allow compounding to work it’s magic. That’s why you end up with more when you invest $100 a month versus waiting 12 months to invest $1,200.
Using that same principle, you can exponentially increase the growth of your account’s monthly payouts by adding more funds after the initial investment. And withdrawing slows down the income growth.
Since many asset payouts are per share, it’s better to buy and reinvest when prices dip. We actually stop withdrawing when the market goes down to allow exponential share accumulation to increase future earnings — why not?!
If you buy assets low, you get the perk of account value growth when the market goes back up. This isn’t necessary for this strategy, but it’s nice when it happens.
Conclusion
While there’s technically no set minimum to start investing, you’re going to get much better results from a healthier sized account or one that’s allowed to compound over many years.
Your personal preferences and expected lifestyle play significant roles in your much you’ll need to invest. Focus first on a target monthly income number to make it easier to calculate your financial goals, so you can plan to take action.
If thinking of all of this is giving you too much anxiety, just start with what makes you comfortable. You can always add to your investments as you become more confident.
Planning is very useful, but success isn’t possible without also taking action. The next step after deciding you want to invest is to open a brokerage account.
Don’t know which one to go with?
