How much should I invest?

How much of my money should I invest?

How much you should invest depends on your income and circumstances. A general rule of thumb is to aim to invest 10-20% of your take-home pay each month. But if you don’t have much money left after paying your rent, mortgage, bills and essential living costs, you might only be able to invest a small amount each month. Before you start investing you should make sure to prioritise things like saving up an emergency fund so you can support yourself if you were to lose your job, for example. The good news is that investing £10 a month is better than nothing and many investment platforms will let you invest with as little as £1.

If you’re financially stable and you have a good income, you may be able to invest more than 10-20% of your income each month. If you’re new to investing or you’re risk averse, you could start small. You may decide to invest 10 to 15% of your income to begin with, perhaps investing in funds that track the FTSE 100 and other indexes. You could then gradually increase your contributions as you build more confidence and learn more about the stock market over time.  

Perfect for you: Where to invest: 4 ways you could invest your money

Here are a few things to think about when deciding how much of your money to invest: 

Do you have an emergency fund?

It’s a good idea to have an emergency fund equivalent to between 3 to 6 months of living expenses before investing in the stock market. This money will be your rainy day fund which you can dip into if you lose your job, or have a last-minute essential cost to cover like a boiler breaking or needing to replace your car. If you have an unpredictable income or several dependents, saving more than this could give you peace of mind.

Do you have any expensive or ‘high priority’ debts?

If you have any ‘high priority’ debts or debts with a high interest rate, it makes sense to pay those off before investing. If you invest before paying these off, you may find yourself spending more on interest than you could gain from your investment portfolio. 

Are you saving for a home?

If you’d like to buy a home in the next 3 to 5 years, investing your house deposit can be risky. Thanks to high-interest savings accounts such as Cash ISAs and Lifetime ISAs, it’s possible to make your deposit work for you without risking it on the stock market. The amount you’ll need to save will depend on your ideal property price, how much you can afford to borrow and how soon you’d like to buy.

Let’s say you’re looking at buying a house worth around £200,000 in the next 4 years. You’ll usually need a deposit of around 10% which would be £20,000, though it may be possible to buy a house with a smaller deposit. To save £20,000 in 4 years you’ll need to save £5,000 a year (or just under £417 a month). 

If you’re a first-time buyer, you can make your life easier and get on the property ladder sooner by saving your deposit in a Cash Lifetime ISA. You can save up to £4,000 a year in a Lifetime ISA (which works out at just over £333 a month) and the government will boost your LISA savings by 25%, giving you a free bonus of up to £1,000 each year.

You can spread your £4,000 LISA allowance throughout the tax year or deposit a lump sum in one go, meaning you could potentially reach your £20,000 savings goal in just over 3 years if you make your final £4,000 payment at the start of the tax year.

Don’t forget to set money aside for conveyancing costs, valuations, mortgage fees, removal vans and in some cases Stamp Duty. You’ll need to use a Cash ISA or regular savings account for these costs. If you withdraw money from your Lifetime ISA before the age of 60 for anything other than your first home deposit, you’ll pay a 25% penalty on the amount you withdraw.

If you’re happy to wait for more than 5 years before buying your first home, you may get a better return by investing your money. However, the value of your investments can rise and fall over time and you may lose money. You can reduce the risk by diversifying your investments and investing for the long term, but if you want to withdraw your money at a time when your portfolio is underperforming, you may get back less than you put in. 

Take a look at our index funds guide to learn how funds can be used to diversify your portfolio and minimise volatility. You might also find our Active vs Passive investing guide helpful.

Are you investing for retirement?

If you’re investing for retirement, the amount you should invest depends on your age, income, planned retirement date, and the type of lifestyle you’d like to have. It can be hard to work out exactly how much you’ll need, but research from Retirement Living Standards suggests that a single person would need an income of £43,100 a year to live a comfortable life in retirement, while a couple would need £59,000. 

If you retire at the age of 70 and live for 10 years, a pension pot of £431,000 should in theory be enough, but the same figure would provide a much more modest standard of living if you had a 20 or even 30-year retirement. 

Don’t worry if you’re not able to save that much. An income of £14,400 for a single person or £22,400 for a couple could cover your basic needs and leave a little leftover for fun and social occasions, according to the Retirement Living Standards data. 

If you’re worried that you’ll run out of money in retirement, speak to a financial advisor. They’ll help you work out exactly how much you should invest and give you peace of mind. 

Read more: How much pension do I need?

How much can I invest in an ISA?

You can invest up to £20,000 each tax year in a Stocks and Shares ISA. Remember that if you’re saving for your first home or retirement, you can save or invest up to £4,000 of your ISA allowance in a Lifetime ISA each tax year and the government will boost your contributions by 25%. Max out your LISA five years in a row and you’ll receive a sweet £5,000 LISA bonus towards your home deposit or nest egg!

There are two types of Lifetime ISA to choose from: a Cash Lifetime ISA (which pays interest) and a Stocks and Shares Lifetime ISA, where your contributions will rise and fall based on changes in the stock market.