How Much Money Do You Need to Start Investing?

What to Do Before You Start Investing

Before we talk about how much money you need to start investing, it’s important to back up a few steps and talk about how you know when you’re ready to invest at all. Financial experts generally agree that there are a few financial foundations that should be in place first.

“A couple of things I look for when reviewing a client’s finances before I even start talking about an investment plan are making sure you’ve paid off all high-cost debt — which we classify as anything with an interest rate above 5%,” said Andrew Westlin, a CFP and Senior Financial Planner for Betterment. High interest credit card debt is the most toxic. Try to get rid of that first before you invest. “Also having an emergency fund are two key things to have in place before we start investing.” An emergency fund can help you tackle unexpected expenses should they arise. Experts agree that it’s best to have a 3-6 month emergency savings in liquid cash. 

Once you have those financial foundations in place, you can start exploring investing, even if you only have a small amount to work with.

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Getting started

Once you’ve chosen a broker, decided what your investing goals will be and have your initial investment amount in hand, you’re ready to choose your first investment.

Good luck, and welcome to the amazing world of investing!

Create a Spending Plan

The mistake many people make when creating a personal spending plan is they determine their savings amounts around their monthly expenses, which means they save what they have leftover after expenses.

This invariably results in a sporadic investing plan, which could mean no money is available for investing when expenses run high in a particular month. People who are intent on achieving their goals reverse the process and determine their monthly expenses around their savings goals. If your savings goal is $500, this amount becomes your first expenditure.

It is especially easy to do if you set up an automatic deduction from your paycheck for a qualified retirement plan. This forces you to manage your expenses on $500 less each month.

Where to Start Investing

One of the most important steps to getting started with investing is deciding where you’ll actually invest. Today, there is no shortage of brokerage firms where you can start investing quickly. NextAdvisor recommends online brokers like Vanguard, Fidelity, and Schwab because they make it easy to open an account online and have a wide variety of investments to choose from.

For investors who prefer a more hands-off approach, a robo-advisor is also something to consider. When you sign up for a robo-advisor like Betterment, Wealthfront, or Ellevest, an algorithm chooses investments on your behalf based on your financial goals and time horizon. This option might be well-suited to investors who don’t know what to invest in and are allowing analysis paralysis from allowing them to take the next step.

Just as it’s important to talk about what company to open an account with, we should also talk about what type of account to open. While a taxable brokerage account is a great option, experts agree that investors take advantage (and max out) all their retirement accounts first, to take advantage of the tax breaks associated with them. For example, a Roth IRA.

“I do recommend that, especially for young people, that they consider their first investment to be in a Roth IRA account,” Berkowicz said. “They provide for tax-free distributions, both during the lifetime of the contributor and for their heirs.”

A Roth IRA can be a great option for everyone from the teenager working a few hours per week to earn money to the professional who is ready to take investing more seriously. And for those who make more income than the Roth IRA allows, a traditional IRA also allows investors to save for retirement in a tax-advantaged way.

Conclusion

There are many different ways to generate passive income and make $3,000 a month. In this article, we analyzed just three different approaches you could take. As we have demonstrated, the initial investment varies considerably depending on the approach you choose. The approach you decide to take will depend on your risk profile, how much money you have and are willing to invest, as well as the time and effort you’re willing to commit to generating the returns.

There are many other ways to invest your money and make $3,000 a month. You can find some other ideas in our article on alternative investments. You have to find the most appealing investment assets to you, build knowledge, and take action when ready.

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How Can You Invest in ETFs as an Alternative to Mutual Funds?

The best alternative to mutual funds is exchange-traded funds, also known as ETFs. Mutual funds and ETFs are similar. That’s because both enable investors to get exposure to dozens or hundreds of securities. All you have to do is purchase one fund.

Note The main difference between mutual funds and EFTs is that ETFs trade intraday like stocks. On the other hand, mutual funds only trade at the end of the day.

With regard to fees, ETFs don't have minimums. But like stocks, ETFs often have commissions or transaction fees each time you make a purchase. Some investors may be able to trade some ETFs with no commissions or transaction fees. For instance, Vanguard allows its account holders to buy Vanguard ETFs at no commission or transaction fee.

Invest According to Your Risk Profile

This investment plan assumes an average annual rate of return of 6.5%, which is achievable based on the historical return of the stock market over the last 100 years. It assumes a moderate investment profile, investing in large-cap stocks.

If you are adverse to risk or prefer to include investments that are less volatile than stocks, you will have to lower your assumed rate of return, which will require you to increase the amount you invest.

At a younger age, you have a longer time horizon, which may allow you to assume a little more risk for the potential of higher returns. Then, as you get closer to your retirement target, you will probably want to reduce the volatility in your portfolio by adding more fixed-income investments. By staying focused on your benchmark of a 6.5% average annual rate of return, you should be able to construct a portfolio allocation that suits your evolving risk profile over time, which will allow you to maintain a constant monthly investment amount.

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