This is one of the really frequent questions that appear when discussing with new investors. It is a pretty straightforward question but the answer is not that simple. There are various different factors that have to be calculated in order to figure out the right amount. A common mistake is to just use a calculator to see how much money can be saved per month and then take that amount and invest it. That would leave you unprotected on the long run.
If you want to determine how much money should be saved to start investing, you need to consider the following aspects.
Desired Passive Income From Investments
This needs to be calculated at a yearly level. It is a figure that has to include acquisition costs for all the things that you want to buy, upkeep costs, maintenance costs and everything else you would use the money for. Based on this passive income the investment and saving amounts will be properly calculated.
Value fluctuations are normal with investments but how much you are willing to take is something that you decide. You want to think about how fast you want to become rich since this impacts the value swings that you will have to deal with. The account may end up dropping around 50% when you use aggressive investment strategies but this can also be the case with increases that would appear.
When Is The Money Needed?
You have to think about how old you are going to be when you will access all the money that you invest. That counts since tax-deferred and tax-free accounts are not available when withdrawing money before you reach a specific age. If you are not of that age you have to pay penalties. Early withdrawal fee is normally around 10% of how much you take out, which can be a pretty large part of the profit you make from the investments.
Necessary Living Standard
We all have some wealth goals and in many situations we need to sacrifice a part of our living standard to be able to reach that goal. Based on how much you are willing to sacrifice you can save a higher or lower amount. Generally speaking, you should never invest more than what you are comfortable with if living standards go down to a level that is completely unacceptable for you.
The money that has to be saved in order to start investing is something that you determine based on everything above and how much you are actually comfortable with. Remember that maintaining a proper living standard is always a priority that should never be neglected. Be sure that you do not put all the money you save in investments. You have to also create a backup fund that would be used in the event emergencies happen.
Saving money is something we should all do and a part of that money should be put into investments in order to basically get more money on the long run. You can start as low as a hundred dollars if you want to.