How much money should I invest?

Investing should be looked at as a long-term commitment of money, such as for retirement or an education fund. The first thing to know before deciding how much to invest is knowing how much you can afford to invest --- and how much you can afford to lose if the investment loses its value.

Affordability

Financial advisers generally consider 10 percent of monthly income the amount a person should be saving for retirement --- and more if you are young and single. A study by T. Rowe Price recommends setting aside at least 15 percent of monthly income in a retirement investment account. This should be in addition to approximately 10 percent saved for emergencies and another 10 percent for big ticket items like houses and cars. One should never invest money in risky investments if its loss would pose a hardship.

Risk Management

Level of risk tolerance is an important consideration in deciding how much money should be invested. Highly rated bonds and common stock, rated AAA for the most secure down to AA and A for lesser security, are appropriate for any investor seeking to avoid risk. One can potentially afford to invest more money in government guaranteed U.S. Treasury bills and bonds, blue-chip stock, FDIC insured certificates of deposit, money market funds, and other reasonably safe securities than in speculative stock and commodities that fluctuate in value. Blue-chip stock will fluctuate with the market, but it should hold its value better over time than speculative stock.

Purpose

When accumulating money for a specific purchase, set aside larger amounts but keep quality ratings high because the money is needed within a shorter period of time and should be in a safe investment to prevent loss. Use an online money management calculator to determine how much money must be saved at what rate of interest over how much time in order to achieve a desired amount.

Speculative trading should only be undertaken with extra money that is not needed for other purposes. One good strategy for speculative trading is to take out the original investment amount and set it aside as emergency seed money to be used in the event a bad investment decision results in significant loss.

Long-term investing, using the dollar cost averaging method, allows a specific amount to be invested in one or a basket of selected securities. Sharebuilder.com allows users to accumulate small amounts of money over time as do dividend reinvestment plans that often allow for direct investing at the issuing company.

Source:

MSN Money, "A Beginner's Guide: How Much Should I Invest?"

University of Maryland, "How Much Should I Invest Each Month?"

Resource:

Money calculators

Dollar Cost Averaging

Dividend Reinvestment Plans (DRIP)