How much is the right amount to spend on investing in the stock market? It’s a great question, and one that doesn’t have a single answer. What one person chooses to spend can vastly differ from another, simply because everyone’s circumstances are unique. But, there are some guidelines you could use to help you settle on an answer.
Maybe you’ve just started investing and you’re wondering what the ideal amount to invest is. Or, perhaps you’ve been at it for a while and you’re curious whether your chosen sum is the right one. It’s an understandable (and very common) consideration.
But, it's just like the “right” amount of money to spend on housing and the “right” amount to have in super . There’s no one-size-fits-all answer to how much of your income should go towards investing in shares and ETFs . The ideal figure is different for everyone, because it boils down to several factors that are highly variable.
To try and figure out a suitable investing amount, ask yourself the questions below.
What are my financial goals and timeline?
One of the first and most important things to think about is your financial goals – because these likely underpin why you’re investing. Are you solely focusing on your long-term investing targets? Or are you saving towards other objectives like a holiday, a new car, or your kids’ education ?
If it’s the former, you may allocate a higher percentage of your income to investing. If it’s the latter, you may want to commit less to your portfolio to accommodate your other targets.
Can I cover my living expenses?
This is crucial because you probably shouldn’t be thinking about investing unless you can cover your day-to-day expenses on your current income. There’s no use putting $100 a week into the stock market if you can barely afford your power bills.
Creating a budget can help you work out how much you’re spending on living expenses and how much you have left over. When you’re writing up your budget, make sure to include:
- Rent or mortgage payments
- Property taxes and strata fees
- Utilities
- Phone and internet
- Insurance
- Groceries
- Gym memberships
- Car payments, including petrol
- Public transport
- Schooling or childcare
- Pet care
- Debt repayments
- Tax obligations
- Ongoing medical costs
- Any other non-negotiable expenses – this can look different for everyone
How much disposable income do I have?
Your disposable income is effectively your take-home pay, minus your essential expenses. While there’s no right or wrong way to spend your money, the amount you make could be a key factor in how much you choose to invest.
For instance, if you’re a high-income earner, you may be able to easily cover your living expenses and have a decent amount left over for investing. If your income is on the lower end, you might have less money to assign to your investments. That’s not to say investing is impossible for those on lower incomes, but budgeting could be a more important consideration. This might seem obvious, but it's worth acknowledging here.
Do I have an emergency fund?
Within the long-term investing community, an emergency fund is usually seen as a necessity. At Pearler, we agree with this assessment. It can provide a financial safety net if you come up against unexpected expenses, like a medical emergency or urgent repairs to your home.
There’s no hard-and-fast rule on how much you should set aside, but many in the Financial Independence community suggest saving around 3-6 months of living expenses. However, this could vary wildly depending on your circumstances and risk tolerance.
Let’s say you pay a lot for housing, have two kids in childcare, are paying off significant debt and financial security is a constant worry. You might accumulate a bigger emergency fund because it’d be pretty crucial if you suddenly had to cover several expenses. On the other hand, someone with cheap housing, no kids, zero debt and minimal concern over money might feel more comfortable with a small rainy day fund.
These examples are obviously extreme, but they illustrate how differing financial scenarios could affect your decisions.
What’s my risk tolerance?
Your risk tolerance is a measure of how much volatility you’re comfortable with. It’s often used to determine the kinds of investments investors go for. Someone with a low risk tolerance might opt for more conservative investments like gold or bonds . Someone with a high risk tolerance may be more inclined to invest in growth shares .
Risk tolerance can also apply to how much you choose to invest. If you’re a more conservative investor, you may only feel confident allocating a smaller percentage of your income to investing. If you’re more aggressive, you might be OK with committing a higher amount.
To figure out where you land on the risk spectrum, you can use our guide to figuring out your risk tolerance . In essence, though, you want to think about how you’d feel losing any money you put into the stock market and how comfortable you are with volatility.
Am I investing with a partner?
If you’re joining forces with someone, you might choose an ideal investing amount accordingly. Pooling resources could potentially give you a larger amount to invest.
When you’re investing with someone else, it’s important to be transparent about your financial goals, both individual and shared. You might hope to pay off your student debt as soon as possible, while they may be ready to go all-in with investing. If you plan to retire together, have kids or buy a home, these plans may affect your investing amount, too.
It’s also crucial to discuss your risk tolerance. Each of you might have differing views on what you’re comfortable investing in and how much you’re willing to part with.
Do I have dependents or family obligations?
You might have kids or family members who you’re supporting financially. Bearing this kind of responsibility inevitably impacts how much you can invest because you’re liable for certain costs.
Reflect on whether that money should remain liquid in case you need to lean on it. You might come up against unexpected family emergencies, or future costs like your kids’ education or care for elderly family members.
Do I own my own home, or would I like to?
If you’ve already purchased a home, you’re likely not saving for a deposit – possibly giving you more money to invest. (Although you may be required to make mortgage repayments – which we cover later).
However, if you’re still working towards your home deposit, you might be putting more money aside, either in savings or towards other homeownership initiatives – like the First Home Super Saver (FHSS) scheme . This allows you to make voluntary super contributions which can then be withdrawn to put towards your first home.
Do I have regular mortgage repayments?
Ongoing mortgage repayments can limit the amount of disposable income you have. While renting also takes out a fair chunk of income, mortgage repayments can sometimes be substantially higher. If you’re paying off your home loan, you may want to think about your mortgage obligations and how these could intersect with investing. For those so inclined, one potential option is debt recycling .
Remember, too, that your mortgage repayments could change. Transitioning from a fixed rate to a variable one can impact your repayments, as can fluctuating interest rates. Factor this into your planning.
Do I have any debt?
If you have outstanding debt , consider whether it’d be worthwhile paying it off before investing .
Here, it can be useful to understand “good” and “bad” debts . “Good” debts help build wealth, such as student loans and home loans. “Bad” ones diminish your financial health and include high-interest debt like credit cards and personal loans.
We know it’s not necessarily that black and white when it comes to debt, however framing your debts in this way may help you decide whether to prioritise them over investing.
Do I have an employer who contributes to my superannuation?
Did you know your super fund invests in many of the same assets as traditional investing? Some of the main investment types include shares, property, bonds and cash, so you could already be investing in these areas via your super.
If you have an employer who contributes to super on your behalf – as a large proportion of Australians do – you might already be exposed to the share market. This could influence how much you choose to invest independently.
If you don’t have an employer contributing to your super – perhaps if you’re self-employed – you may decide to invest on your own to gain stock market exposure. Alternatively, you may choose to make voluntary super contributions.
When do I plan to retire?
Are you hoping to achieve Financial Independence and retire early ? Or are you sticking with the traditional route and aiming to retire later in life?
Early retirement may require investing a higher amount. You’re working with a shorter timeline and will likely need to generate returns at a faster rate. You might also have to invest more regularly so your investments have the opportunity to grow and compound.
A longer timeline before retirement means you have more time to build a decent nest egg. You may not need to set aside as much for investing, because the returns can afford to be slower.
Other considerations when it comes to retiring early include your specific FIRE approach , your intended lifestyle in retirement, and other ways you’re working towards Financial Independence (like super and property investment ).
Am I willing to sacrifice other expenses?
If investing is a high priority for you, you might be comfortable foregoing other expenses to enable you to invest more. Perhaps you’re happy skipping Friday night drinks and putting discretionary money towards shares, or maybe you’re willing to cut down in other areas like travel, expensive clothes or food delivery.
Alternatively, if you’d prefer to spend your money on certain lifestyle choices, you might allocate a smaller budget for investing.
Either is totally valid and totally personal – how you choose to spend your money is your decision.
Have I accounted for potential future changes in my financial situation?
It’s all well and good to figure out an ideal investing amount that suits your current finances, but things can and do change.
If your income goes up or down in the future, it could impact how much you can afford to invest. The same applies if you suddenly find yourself with higher expenses, like having kids, supporting family members, or buying a home. You might also face external events like inflation or economic downturns , which could affect your strategy and returns.
No one has a crystal ball, of course. Even so, this serves as a good reminder to remain flexible and adjust if your situation shifts.
With all of these factors in mind, how much should I spend on investing?
Just like your circumstances are wholly unique, the amount you choose to invest is personal, too. Investing is an incredibly individual journey, and while these questions can help, the amount you settle on may be totally different.
To make the planning phase a little easier, Pearler has a bunch of nifty calculators that could guide your decision-making:
- Investing Amount Calculator
- Investing Frequency Calculator
- Investing Duration Calculator
- Compound Interest Calculator
As always, consult a financial adviser if you need tailored advice on your financial situation.
Happy investing!
