How Much Do You Need To Invest To Secure Your Financial Future

Whilst it’s a simple question to ask, the answer is more complex than people initially realize. It’s a common question I get asked amongst friends and family and it usually takes me a while to explain to them why it’s not a simple answer. There are some key factors to consider which I've outlined below. 

Outcome You’re Trying To Achieve

Let’s start with two very different scenarios to illustrate my point. 

Sandy is a Dentist who is wanting to go part time at the age of 45 and is looking to top up her income with investments. She currently earns $170k per year. 

Gill is a Teacher and is looking to retire early at the age of 45. She wants her investments to replace her full time income. She currently earns $95k per year. 

Let’s make the following assumptions:

• Average dividend yield of 4% from the ATO site for 2024 (e.g. both Gill and Sandy will receive a 4% payout of the total value of their investment portfolio)

• Gill will work 4 days a week instead of 5

• They don’t sell any of their shares to achieve extra income

• They only invest in shares to fund their replacement income

With these scenarios Sandy would need roughly $1.05M in investments to replace 25% ($42.5k) of her income and Gill would require $2.38M in investments to replace all of her income. 

As you can see, these are pretty large numbers and it’s a calculation that people rarely do before they start investing. How much of your income are you looking to replace with investments? I’ve created this simple calculator to help you test various examples:

Having an outcome in mind is going to crystalize what steps you’re going to need to take to make them a reality. One thing to also keep in mind is how much money are you are actually going to need (e.g. do you really need to replace your full time income salary to achieve the goals and dreams you want?). 

Not All Investment Risks Are Equal

In the above example I used shares as the example investment to generate your passive income with an assumed 4% annual return on their investments. Not all investments have this rate of return (some higher and some lower) so you need to do your research to understand what is the estimated annual return. 

For example, cryptocurrencies don’t pay out dividends and you only make money by selling the asset for a higher price than when you purchased it. The same rule applies for commodities such as Gold or Silver.

The other factor that makes investments different is their level of risk for the investor. 

Taking a look at a variety of sources, the image below broadly outlines the different types of assets and their respective risk levels. 

A good rule of thumb here is the more speculative the asset is (e.g. trying to predict the future growth/decline), the higher the risk. So what is your risk appetite? All of this also has tax implications that you need to factor in on any gains or losses you make. 

What Should My Starting Investment Be?

There are a couple of schools of thought here. 

On the one side you have people saying only when I have x dollars then I'll start investing. On the other end of the spectrum you've got people starting small and growing their skills to prepare them for larger amounts of investing. 

The good news is that you can combine both approaches through the use of a practice account. This allows you to practice your skills using a large amount of pretend funds to see how your decisions play out. 

https://www.etoro.com/au/trading/demo-account/

I’ve included some sample screenshots of how the platform works. Just make sure you’ve selected Virtual Portfolio. This will give you access to $100k of virtual money that you can use to simulate share purchases. Please note this is not an endorsement of the platform, I’m merely showing you one of many demo accounts you can try.  

Make Sure You Have Switched To Your Virtual Portfolio

Once You Have Made A Virtual Trade It Will Appear In Your Portfolio

For those of you who are interested in learning more about investing, I offer a variety of courses where I can take absolute beginners and turn them into investment pros. Book your free 15 minute consultation to discuss your situation. 

Summary

So coming back to the original question of how much do you need to invest to secure your financial future? Once you've figured out the outcome you're trying to achieve and the risk level you're prepared to take then you will have your answer. I hope you've found this article useful and I'd love to hear about your financial goals and how you plan to get there. 

Until next time

James

Disclaimer:

None of  the content is intended to provide you with personal financial advice. Information provided is factual and educational in nature for you to apply at your own discretion. 

You may wish to seek independent financial advice from a professional advisor for advice pertaining to your specific situation.