How Much Should You Save Before Jumping into Investing

The question of how much you should have saved before you jump into investing is a personal one. Everyone has different needs and different goals, thus for everyone, the question is a personal one. However, there are some general rules of thumb which can help you to make the decisions more clearly. Here’s what you need to know:

You Need an Emergency Fund

First and foremost, if you don’t have one (most Americans don’t), you need an emergency fund. This should be at the minimum between $500-$1,000 in easily liquid funds (i.e. a savings account) which you can draw on in case of an emergency. Most emergencies tend to be in that price range (the need for a last minute ticket, the need to send a few hundred dollars to your child who is stranded, the need to get a roof repair done, etc.). Thus, simply having a relatively modest emergency fund means that you’ll be able to pay for those problems without the need to draw on credit cards with their massive interest rates.

3-6 Months of Salary

Another common suggestion (much harder to do) is that you should have between 3-6 months worth of salary available in a semi liquid form (i.e. a money market fund, CDs which you can pull money out of early, etc.). The idea is that you’ll have a barrier against losing your job, which is a real concern with the economy being the way it is. The thing is, most people tend to find the idea of raising six months of salary to be quite daunting (if you make a relatively modest $50,000 per year, that’s $25,000 – not exactly easy to save when you just barely get by).

What about Investing?

We’ll get back to discussing how much you need to have saved in a moment, but let’s talk for a moment about investing. Most people tend to think that investing means putting thousands or tens of thousands of dollars into a single stock. However, smart investors know that you can invest as little as $25 per month. Yes, just twenty five bucks a month. Or, to put that another way, you skip eating out for lunch once or twice a month and brown bag it instead and you’ve got the money. Is it going to make you rich? Eventually, maybe (if you’re a 25 year old and invest just $25 per month until you retire, you would have a nest egg totaling more than $100,000 when all was said and done).

How It Works

These kinds of investment plans (which truth to tell are getting harder to find – about the only one we could find which still lets you do $25 per month and start with just $25 is GoalMine) work through dollar cost averaging. The idea is that you invest a little each month, regardless of whether the stock is up or down. Then, when all is said and done, you’ll find that your money ultimately grows because the steady investing smoothes out temporary dips in the market.

But How Much Do I Need Saved?

We promised you some rules of thumb at the beginning of this article and so here they are: If you have your emergency fund already put together, then the odds are good that you’re ready to start investing. Remember, you don’t need to put aside thousands of dollars to invest. You can do so with as little as $25. On the other hand, if you work in an industry where you think there’s a real chance of a layoff, then it may be best to try to save up some money for lean times before you invest (since investing needs to be a long term effort rather than one where you need to pull your money out quickly).

—
George Gallagher is a writer for all things related to investing and managing your money. He also helps people with their consolidation of private student loans.