How much money do I need to start investing?
When we face the idea of investing for the first time, we all have these 3 common doubts about how to get started.
- Investing looks difficult and risky.
- The lingo is confusing and hard to figure out.
- Do I need a lot of money to start investing?
All of these barriers are the ones we are breaking down at Pitly, but let’s face the question we all have in mind when we start investing:
How much money do I need to start investing?
To set this up, we are assuming that we want to invest and create a portfolio for the long run.
Before we think to invest we have to be sure that we have an emergency savings fund (or rainy day fund) to cover unexpected things that can happen in the future. Please don’t invest money that you will need in the short term or you will have a very bad experience if something goes wrong.
Once we have our emergency fund, we can take a look at our personal finance to see how much money we can invest on a monthly basis. So, take a look at your income and all your expenses to see how much money you have left at the end of the month.
I would say that everyone can save more than they would expect at the beginning of this exercise. Maybe you are able to cut some services you don't need and try to be more frugal, but I don't want to go this way.
Let’s say you can save $50, $100 or even $150 a month to start your portfolio. You would think this is too low to start investing but it's not. You should start thinking long-term and look into the future to start building your own financial freedom (or at least part of it). Maybe with these savings you can shorten your retirement age by 3-4 years, it’s up to you.
However, this depends on your lifestyle.
Nowadays your bank account is giving you a nearly 0% interest rate in your savings account. Therefore, it’s a good time to start learning about investing.
If you are able to save $150/month to start your portfolio you are in a good starting point to make great returns. Between 1950 and 2009 the stock market returns, on average, were 7%.
Trent Hamm, on his article, Average Stock Market Return: Where Does 7% Come From? points out 1 thing you should know:
“Past performance is no indication of future results. That simple statement is true of any investment. It’s true of almost anything in life.”
We are not saying that this is easy but is not impossible! As Warren Buffet said once:
“It is not necessary to do extraordinary things to get extraordinary results.”
Ok, I know. Nothing in life is certain but death and the taxes. Don’t be scared of this.
Assuming that you are 25 years old when you are reading this and you want to retire by age 65, investing $150/month at a 7% annual interest rate you can make an astonishing $393,722
That’s besides your retirement plan at your work.
That’s a lot of money! How is this possible?
The answer is compounding interest.
We will provide more guidance on this on our next posts but basically, you are making "extra money" of your interest every single year for all the years you hold your investment. Think of it as interest on interest.
I can give you a calculator to play around and see how much money you can make playing with the variables.
If we set up the calculator with our data set.
Step 1: Your initial Investment
Here we are going to field 0 because we don’t have any initial investment (in this case, for sure you can put extra money to start with). If you put a different number here, you will see how your money grows over time. It’s amazing. Even with an initial $1000 you make an extra $16,311to make in total 410,033.
On this field the higher the better. :)
Step 2: Contribute
In our case, $150/month. On the length time, input the number of years you are going to contribute.
Step 3: Interest Rate
Here, as we said, we are going to input 7%. Note that any changes here, for best or worst, can make a huge difference.
If you can make an extra 1% over the years, you would end up with a sizable chunk of “extra” cash compared to our initial case. Let’s say we can we able to earn an 8% interest rate. That come out to $523,651. That means an extra $129,929 of gravy on top.
Step 4: Compound It
On this field, just input MONTHLY to make all the calculations.
At this point, you will be asking you some questions like:
This is beautiful but, how can I do something similar?
Stay tuned. At Pitly we are breaking all the investment barriers. Download the app and start learning how to pick the best stocks.