Investing money: how much do you need to invest?
Learn to investHow much money do you need to invest?
Many people think you need a lot of savings before you can start investing. That is not the case. You do not have to put in a huge sum of money to start investing. You can make it as extensive as you want. In this module, you will learn how much money investing requires and what you should look out for when you start investing. Read on and discover what works for you.
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From what amount can you start investing?
You can already start investing with relatively small amounts. Nowadays, it is possible to start with a monthly investment from just a few pounds. This makes investing accessible for beginner investors. The exact amount depends on the way you want to invest, your wealth, and your personal situation.
How much money do you need to invest?
How much money you need to invest depends on your personal situation. A commonly used method to determine the amount is the ‘50-30-20 rule’. If you budget according to the 50-30-20 rule, you divide your monthly income into three categories:
- 50% for your fixed costs
- 30% for your personal needs
- 20% for your savings, repayments, and investments
Suppose you earn €2,000 per month. According to the 50-30-20 rule, you arrive at an amount of €400 per month with which you can save and invest.
How can you invest money?
There are several ways to invest money, such as self-directed periodic investing, investing with advice, and investing in investment funds (managed investing). Below, we explain these three methods to you and how much money you need for them.
1. Periodic investing
Periodic investing is a popular way to start investing, especially among beginner investors. You deposit a fixed, small amount every month, for example €10, and let the money grow over the long term. To do this, you open an investment account with a bank or broker, such as BUX. The broker is your official partner for placing orders on the market. You receive no personal advice and are yourself responsible for the management of your portfolio.
The characteristics of periodic investing:
- You spread your investments over a longer period.
- You build a fixed habit.
- You do not have to continuously time the market.
2. Investing with advice
With investing with advice, you can have your money invested by experts. These experts make the decisions and tailor your portfolio to your goals and risk profile. This can be interesting if you have little time or knowledge. For investing with advice, you often need higher amounts, sometimes from €500,000.
The characteristics of managed investing:
- Often a higher minimum deposit.
- The costs are usually higher than with self-directed investing.
- Less personal control, but more convenience.
3. Investing in investment funds (managed investing)
An investment fund is a collective pot in which the money from multiple investors is brought together. That money is actively or passively managed by a fund manager. When you invest in an investment fund, you buy a piece of that fund, also known as a participation. You can start from just a few tenners.
The characteristics of investing in investment funds:
- Immediate diversification across many different stocks, bonds, or other financial products.
- Convenience because a fund manager makes the selection for you.
- The costs for actively managed funds are higher than those for passively managed funds.
- Lower threshold to enter complex markets or sectors.
Does investing €50 per month make sense?
Investing €50 per month can certainly make sense, provided you do it for a longer period. The longer you invest your money, the greater the chance that you can let your wealth grow. Small amounts can deliver a meaningful result together through time and compound interest. But beware, there are risks associated with investing. Past performance is no guarantee of future results.
An example of investing with €50 per month
Imagine that you invest €50 every month in a global index fund. In this example, we assume an average annual financial return of 6%. In some years you will achieve less return, in other years a bit more. After 20 years, your total deposit of €12,000 has grown to nearly €23,000 (excluding extra costs). Although you set aside a low amount every month, time ensures that your return eventually becomes larger than your own deposit. But note: with investing, you can lose part of your deposit.
What should you look out for when you start investing money?
Before you start, it is wise to delve into a number of points of attention: your investment goal, how much money you can spare, your financial buffer, the additional costs, and your risk profile. Let’s take a look at those.
1. What is your investment goal?
First of all, think about your investment goal. Perhaps you want to build up more pension or save for your children’s future studies. Your goal determines your investment horizon and how much risk you can take. The longer the period, the more fluctuations you can absorb.
2. How much money can you spare?
In addition to your investment goal, the advice is to look at how much money you can spare to determine your monthly deposit. If you need the money in the short term, investing is less wise. With investing, you run a risk and investments can fall in value. Ensure you do not end up in a situation where you have to sell at a loss.
3. What is your financial buffer?
Ensure you have a financial savings buffer for unexpected expenses before you start investing. Suppose your washing machine suddenly breaks down, or you lose your job. In those cases, you would rather not have to touch your investments for unforeseen expenses.
What constitutes a sensible amount depends entirely on your personal situation. Often, 10% of your net income is advised, which is approximately three to six months of fixed costs. Do you want to know exactly what your buffer should be? You can calculate it with the Buffer Calculator from Nibud.
4. What are the costs?
It is also good to look at the additional costs. These can influence your expected return. You should think of monthly service fees, transaction costs, and management fees. Although these percentages often seem small, they can eat up a part of your profit in the long term. It therefore pays to look closely at the rates.
5. How much risk are you willing to take?
Investing involves risks and you can lose money. Some forms of investing can be riskier than others. Therefore, it is wise to map out your risk profile: how much risk are you willing to take?
Your risk profile can be (very) defensive, neutral, or (very) offensive. For example, stocks offer the chance of higher returns, but also more fluctuations. Bonds are usually more stable, but often yield less. It is good to ensure a proper spread within your investment portfolio (diversification). This allows you to spread the risks better.
Investing from €10 per month at BUX
Do you want to start investing money periodically in an easy and accessible way? At BUX, you can already start with the Investment Plan from €10 per month. If you choose your stocks, ETFs, and/or ETCs, we will ensure that your deposit is automatically invested. The only thing you still have to do is choose a day of the month and determine your goal. This way, you can work towards a positive return.
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Investing involves risks. You can lose your investment.
All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
