The short answer? As much as you can afford, without compromising your other financial priorities.
Investing is the best way to build long-term wealth. It can also help you become more financially secure in the short term.
Building wealth starts with saving money. But investing accelerates it, and allows a little money to grow over time.
But investing can also be intimidating. What do you invest in, and how much should you invest?
This guide answers the question of how much should I invest in stocks.
Why does investing matter?
Investing allows your money to work for you.
When you have money invested in quality assets (such as stocks), those investments will grow over time — making you more and more wealthy as time goes on.
Consider this example:
- $200 per month saved for 40 years (earning no interest) would result in $96,200
- $200 per month invested for 40 years (earning 10% returns) would result in $1,119,121
Estimate your own investment growth using this investment calculator.
In both cases, you would have saved the exact same amount of money. But through the power of compound interest, investing would result in more than 11x as much money after a 40-year period.
And remember, 10% per year is the average stock market return. You don’t have to be a stock market expert to earn these returns — it could be as simple as investing in index funds.
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How much money do I need to start investing?
Fortunately, you don’t need much money to get started investing.
In fact, many of the best investment apps have no minimum investment at all. You can literally get started with as little as $5!
Some investments, like mutual funds, have a higher minimum investment (often $1,000 or more). Fortunately, exchange traded funds (ETFs) typically have no minimum.
If you want to invest in individual stocks, it’s wise to invest in several different stocks to help diversify your portfolio. For this reason, it’s best to have a bit more money available to invest before you start buying shares of individual companies.
Investing regularly is the most powerful strategy — regardless of how much you get started with. The power of investing really kicks in when you invest regularly. Even if you can only afford to invest $50 or $100 right now, that’s a perfect start.
Simply open a brokerage account with a brokerage firm, invest what you can afford, and set up an automatic investment every month.
How much should I invest in stocks?
The quick answer is that you should invest as much as you can afford to, without compromising your quality of life and your other financial goals.
Want a hard number? Many experts recommend that you save 15-20% of your income each month. For the most growth, most of this money should be invested. However, you don’t necessarily need to invest all the money you save.
Many people will do both — they may save 5% of their income in a savings account, and invest another 15% of their income in the stock market.
But the specific answer to this question depends on many factors. So, exactly how much should I invest in stocks? Here are the questions to ask yourself to find out:
1. How much do I have in savings?
If you have a substantial amount of money sitting in a checking or savings account, it’s often a good idea to invest at least some of it.
After all, savings accounts pay next to nothing in interest — while the US stock market has returned 10% per year, on average, over the last 100 years.
Of course, it’s important to consider your other options for these savings (emergency funds or major upcoming expenses.) You may wish to invest some of your savings, and keep the rest in your bank account.
If you’re concerned about investing a lot all at once, you can consider dollar-cost averaging by buying small amounts each month. This helps even out fluctuations in the stock market, and can be less intimidating if you’re just getting started.
Key takeaway: Investing extra savings that you don’t need for a specific purpose is a great starting point.
2. How much extra money do I have in my budget?
Investing is most powerful when you commit to investing on a regular basis. In the example above, we saw how just $200 per month invested for 40 years could result in over $1.1 million!
When deciding how much to invest in stocks, a great starting point is simple: How much do you have available in your budget each month?
If your take-home pay is $3,500 per month, and your total expenses are $3,200 — you could likely afford to invest up to $300 per month.
Key takeaway: Frequent investing is a powerful wealth-building tool. Any amount you can afford to invest each month is worthwhile.
3. Do I have an emergency fund?
In many cases, building a reasonable emergency fund should be your top priority — even before you start investing.
An emergency fund is an amount of money set aside to pay for unexpected expenses. It could come in handy if you have a major car repair, a medical bill, or if you lose your job.
Many experts recommend that you have 3 to 6 months of basic living expenses in your emergency fund. If you spend $4,000 per month on rent, food, bills and required expenses, you should aim to have between $12,000 and $24,000 in your emergency fund.
Note: If this seems like an unattainable goal, focus first on building up a small emergency fund. Any amount is better than having no emergency fund at all!
If you don’t have an emergency fund, you should focus on building one up before you invest significant amounts of money. If you have an emergency fund already, you can afford to be more aggressive with your investing strategy.
Key takeaway: If you don’t have an emergency fund, you should build one first before investing.
4. What are my financial goals?
Investing makes a lot of sense for long-term goals, and some mid-term financial goals. But it doesn’t often make sense for short-term goals.
You should absolutely invest for long-term goals, including:
- Retirement
- Your child’s college fund
- A dream vacation
- A down payment on a home (5+ years in the future)
- A down payment on a rental property (5+ years in the future)
But for short-term goals — like building an emergency fund, or saving for your vacation next year — it may be best to keep this money easily accessible in a savings account. For short-term savings, it’s best to keep your money “liquid”, which simply means easy to access.
When you invest, it’s best to invest for the long term.
While the stock market tends to go up over the long run, there can be volatility from year to year. You don’t want to invest money you need soon, because you may be forced to sell for a loss if the stock market happens to go down in the short-term.
It’s helpful to write down all your various financial goals. Then, think about which should be investing goals, and which should be simple savings goals.
In many cases, you’ll end up with a mix. You might invest money every month for retirement, and transfer money to a savings account each month for short-term financial goals.
Key takeaway: Long-term savings should generally be invested, while short-term savings are best kept in a savings account. Consider your financial goals when creating your investment plan.
5. Does my employer match my retirement contributions?
Saving for retirement should be a top financial priority. Fortunately, many companies offer employees 401(k) accounts, or other retirement accounts.
If your employer offers a 401(k) plan, you should check with human resources (HR) to learn about the details. Contributing to a 401(k) can help you save money on taxes.
Some companies also offer employer matching on retirement contributions. This means that if you contribute to your retirement account, your employer will also contribute some money.
Ideally, contribute enough to max out the employer matching benefit. For example, an employer may offer:
- 100% matching on up to 5% of your salary
- If you earn $40,000 per year, that means that the employer will contribute up to $2,000
- To max out this benefit, you need to contribute at least $2,000 to your 401(k) each year
Even if your employer does not offer matching, contributing to a retirement account should still be a top priority. The tax savings can be significant.
Key takeaway: Employer matching is essentially free money. If your employer offers it, contributing to your workplace 401(k) should be a top priority.
6. Am I comfortably covering my monthly expenses?
Around 54% of Americans live paycheck-to-paycheck.
If you find yourself struggling to meet your standard monthly expenses, now might not be the best time to invest.
Make sure you’re staying on top of bills, and not adding debt, before you start investing.
This doesn’t mean that you can’t rearrange your spending to prioritize investing, however.
If you spend a lot on optional items (dining out, alcohol, entertainment, etc.), you could certainly shuffle your budget to make room for extra investing money.
Key takeaway: Investing should come after you feel comfortable meeting all your monthly required expenses.
7. Do I have high-interest debt?
If you have credit card debt, or other forms of high-interest debt, it’s best to pay these off before investing. Lower-interest debt, like a mortgage, is a different case.
To determine whether to invest or pay off debt, think about the basic math behind it.
The trick is to compare the profits you could earn in the stock market with how much your debt is costing you in interest.
- The stock market earns, on average, 10% per year.
- The average credit card interest rate is 18.26%.
If you have credit card debt at 18.26%, it doesn’t make sense to invest and hope to earn 10%. Paying off the debt is similar to earning a return of 18.26% — which is difficult to do in the stock market.
On the other hand, if you’re paying 4% interest on a mortgage, investing instead of making extra mortgage payments may make good financial sense.
Key takeaway: You should pay off high-interest debt, like credit cards, before investing.
Bottom line: How much should I invest in stocks?
You should aim to save 15-20% of your income each month.
You don’t necessarily have to invest all of these savings, but aiming to put around 10% of income towards your retirement goal is a great starting point.
In general, long-term savings should be invested in stocks, while short-term savings should be kept in a bank account.
Your specific strategy for how much to invest will depend on these factors and more:
- Your income level
- Your current amount of savings
- How much extra money you have each month after your expenses
- Whether or not you have an emergency fund
- What your financial goals are
- Whether or not your employer offers 401(k) matching
- Whether or not you have high-interest debt to pay off
How to get started investing in stocks
So you’re ready to start investing — but what if you don’t know how?
For beginners, here’s a simple step-by-step guide:
- Assess your risk tolerance to decide how comfortable you are with taking risk investing
- Decide if you want to be an active investor, or a passive index-fund investor
- Consider working with a financial advisor if you want personalized investment advice
- Come up with an investment plan
- Open an investment account with an online brokerage, robo-advisor, or download an investing app
- Start your investment portfolio, with diversification in mind
- Commit to investing for a long time horizon
For more information, see our full guide to investing in stocks.
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