This is a good question and one that I often get asked.
So, in this post, I’m going to discuss a few different investment methods and views when it comes to deciding how much money you should invest. You can then decide which best suits your current situation.
Let’s get going.
First things first
Before you start funneling money away into investments, you first need to have a decent-sized emergency savings pot.
This pot of money needs to be easily accessible and be big enough to cover 3-6 months of your expenses should something happen.
Investing before you have a savings pot is a very dangerous game. Should you lose your job or need to make a large unexpected payment, having to sell your investments at the wrong time can prove very costly.
Your emergency pot also gives you peace of mind and makes it much easier for you to sleep at night.
Right, now that we’ve cleared that up, I can get off my soapbox and onto the various methods.
Method #1 – Invest EVERTHING!
This is known as the F.I.R.E method, which stands for Financial Independence, Retire Early.
This method is extreme. It basically advises you to live the most basic and low-cost life possible, work two jobs, and invest EVERYTHING.
The idea behind this method is that you build up a large investment pot as quickly as you possibly can. Once your investment income covers your living expenses, you quit your job and live the rest of your life on a beach or [insert destination of choice].
Overall, it’s not a bad plan.
However, the main problem is that whilst you are building your investment pot, you have ZERO life!
You don’t go out for dinner, you don’t go to the movies, you don’t buy any luxury items, you turn all your lights off and navigate your house at night via a second-hand candle which you bought on eBay for 25p…
…you get my point!
I’m all for frugality, but I’m also an advocate for living and experiencing life whilst you can. As time goes by, we’re only going to get older and slower. Our younger years are the prime time for adventure! And let be honest, none of us really know how long we’re going to be alive and we should make the most of the time we have now.
On the flip side, it’s not uncommon to hear of people who have followed this method and retired at the ripe old age of 35-years and have the rest of their life to do as they please.
Method #2 – Invest 10%
This method comes from the book The Richest Man in Babylon by George Clason.
As the title suggests, you invest 10% of your income every single month. So, if you get paid £3000, you invest £300. The rest of your income is yours to spend however you wish.
Obviously, you’ll grow your pot a lot slower than the F.I.R.E. method above, and you probably won’t be able to retire early, but you should still be able to live a comfortable life and have a decent nest egg waiting for you when you do eventually hang up your tools.
I like this method becuase it’s simple and anyone can do it, regardless of how much they earn.
Treat your monthly 10% investment the same as you would any other expense. For example, each month when you pay your rent and utility bills, make sure to pay your 10%.
Although it doesn’t sound like much, it soon adds up, especially when the growth of your investments start compounding!
Related Reads: The Magic of Compounding
What are your investment goals?
The method that you choose will largely come down to your own investment goals.
Are you simply wanting to save a bit of money for a comfortable retirement? Or do you want to quit your job as soon as possible and live off your investments?
For most people, they want the second option but they’re not quite prepared to sacrifice their life and go all-in on the F.I.R.E method, and I don’t blame them!
So, your personal method of investment is probably going to be somewhere in between the two.
The question is, how much of ‘now’ are you willing to sacrifice for ‘later’?
I always urge people to invest as much as they can, but if you’ve read any of my adventure blog posts, you’ll also know that I encourage people to live a full life and make the most of today.
P.S. Personally, I probably edge more towards the F.I.R.E method when it comes to my own investments. I don’t like spending money on material objects or liabilities and I try to invest as much as I can, BUT I do make an exception when it comes to adventure and life experiences.
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