Long-term investing will help ensure you have enough money to fund your retirement, while shorter-term investing can help you pay for a second home, send your kids to college or take the vacation of your dreams. The amount you should invest each year, or even the percentage of your income you set aside, depends on your individual retirement needs. What works for you might not be enough for your neighbor.
The amount of time you have until you need the money you're investing is a major consideration in determining how much to invest. While it's always wise to invest as much as you can afford, doing so becomes even more important if you don't have much time. If you need to retire in five years or your child is going to college in the next few years, your investment strategy should be much more aggressive. You'll be less able to benefit from accrued interest in this case and will have to rely more on tapping into your principal.
The cost of the item or lifestyle you want to fund with your investments is a significant investment consideration. If you're saving for retirement, you should plan to cover all of your routine living expenses -- rent or mortgage, car payments, food and gas -- plus have some money for emergencies such as home repairs or medical bills. Determine how much money you'll need and plan your investment strategy around this. One strategy is to invest as much money as you predict you'll need over the course of several years; your interest will cover additional unanticipated expenses. For example, if you decide you need $200,000 for retirement and you have 20 years to invest for it, you could put in $10,000 each year and then count on interest payments or earnings to help you pay for vacations and other luxuries, as well as emergency expenses.
CNN Money points out that most financial planners advise putting the maximum allowable amount into any investment plan that offers tax benefits. This is particularly true if your employer matches contributions to a 401(k), because investing the maximum amount will increase your employer's matching funds. If you don't have much time until you need to access your investment funds, consider a more conservative investment strategy; if you have more time, you can generally take more risks.
10 percent of your income is a good starting point for investing. If you have plenty of disposable income, however, consider investing a hefty chunk of it. A compound interest calculator can give you an idea of how much you're likely to make in interest payments, and a financial adviser can help you determine how much money you need and how you can invest that amount.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.