If one of your resolutions this year is to take care of your finances and start investing, this article will help answer some questions and debunk some myths. Many people associate investing with large amounts of money you must have if you want to even consider entering the financial markets. Some even believe that investing is meant only for growing an already substantial capital, rather than building wealth from scratch. However, it’s important to remember that most experienced investors started with nothing. So, what is the ideal “starting amount”? In this article, you’ll find guidance to help you estimate how much you need for a “good start” and what you might invest in as a beginner.
Investing small amounts at the start allows you to gain valuable experience and better understand how the market works – without risking large sums of money. This way, you can learn from mistakes and develop your investment strategy in a controlled manner while minimizing the risk of significant losses. Additionally, investing small amounts gives you the opportunity to test different types of investments and discover your own preferences and risk tolerance. Over time, you can consciously and gradually build your investing skills, increasing your chances of success in the future.
What is a financial cushion?
A financial cushion provides an emergency fund in case you temporarily lose your primary source of income or face an unexpected event that requires higher-than-usual expenses (e.g., illness, surgery, a car breakdown or helping family members). It is recommended to have funds sufficient to cover between three and six months of expenses, with the target amount tailored to an individual’s financial and personal situation. An emergency fund, although essential before starting to invest, serves solely as a financial safeguard and is not part of investment capital. These are funds meant strictly for living and stability.
The simplest way to estimate its value is to multiply your average monthly expenses by the number of months you want the fund to cover. Once you have this financial buffer in place, you can move on to estimating the capital for your first investment. Only after building your own “safety net” is it sensible to allocate a portion of your savings to investments. This way, even if some investment decisions don’t work out, your essential financial security remains intact. Following this principle helps you avoid situations where risky investments could jeopardize your financial stability or negatively impact your everyday comfort.
How to estimate capital for your first investment?
Your initial investment capital – much like the emergency fund discussed earlier – should account for all your regular expenses. Analyzing them can provide a range of useful insights that will help you more accurately determine how much you can reasonably invest at the beginning. The most common categories of recurring expenses include:
- Food (excluding restaurants, which fall under Entertainment)
- Housing, meaning rent, essential bills and any mortgage payments
- Health, such as medications, private medical visits, physiotherapy or a gym membership
- Transport, including costs related to car maintenance and public transport passes.
- Entertainment, such as cinema, restaurants, theatre, hobbies, etc.
If you want to determine your average monthly cost of living, add all expenses from these categories over the past year and then divide the total by 12.
To calculate how much you can allocate as your “starting” investment capital, subtract your monthly average expenses and money you want to safe from your monthly income. You can then use all or part of the remaining amount for investing.
If you have the possibility, one of the good methods for managing your household budget is the 50/30/20 rule. According to it:
- 50% of your income should go toward Needs (fixed, essential expenses),
- 30% toward Wants (non-essential or lifestyle expenses),
- and 20% toward Savings.
If you follow this method, try to ensure that the funds you put into investments come specifically from this last category.
Risk tolerance in investing
In addition to your financial capabilities, the size of your initial capital should also take into account your individual risk tolerance. It’s important to emphasize this clearly: every investment involves risk. That’s why you should consider what level of potential loss you are realistically able to accept.
For every responsible investor, it’s essential to invest only money whose potential loss would not compromise daily life. Invest only when you’re confident that your financial situation is stable. It’s better to skip an investment and break even than to make a hasty decision and lose savings that took months or even years to build.
Once you understand the risks and recognize your own limits, you can move to the next step: choosing the type of asset for your first investment.
What to invest in at the beginning?
Let’s start – somewhat counterintuitively – with what NOT to invest in. Your first investments should definitely not be high-risk financial instruments such as cryptocurrencies or CFDs. While they may tempt new investors with the possibility of significant returns in a short period of time, many of them are complex and require proper experience and market knowledge to manage the associated risks.
This is why a reasonable middle ground may be investing in stocks or ETFs.
Stocks are securities traded on stock exchanges that grant their holders a share of ownership in the company that issued them. Some companies also pay regular dividends to shareholders – essentially a bonus drawn from the company’s profits. As a general rule, the more stable a company’s market position, the lower the risk associated with its shares.
ETFs (Exchange Traded Funds) are investment funds listed on the stock exchange that provide easy access to a broad basket of assets such as stocks, bonds, commodities or even entire economic sectors. Additionally, ETFs are rated – including in terms of risk level – by specialized agencies, which helps investors make more informed decisions.
Short summary
Estimating the amount of your initial investment capital is one of the most important steps for anyone beginning their investment journey. Equally important is understanding the risks involved, including the possibility of losing part or all of your funds. It’s worth remembering that there is no investor who has never experienced losses. Poor investment decisions should serve primarily as lessons, not reasons to give up. Each such situation is an opportunity to analyze what could have been done differently. The insights you gain from these experiences increase your chances of making better decisions in the future.
FAQ
What is initial investment capital?
Initial investment capital is a small amount of money allocated to test your investing skills. Its purpose is to help you gain experience and knowledge before committing larger sums.
What is the purpose of a financial cushion?
A financial cushion is an emergency fund intended to provide financial support in unforeseen situations such as job loss, illness, car breakdowns or unexpected expenses. It allows you to cover your everyday living costs without needing to take on debt.
What are fixed expenses?
Fixed expenses are mandatory costs that a person must pay regardless of income level. Examples include rent, loan payments, food and fuel. Knowing your fixed expenses is essential for budgeting and achieving your financial goals.
What risks come with investing and where do they come from?
Investing always involves the risk of losing part or all of your invested capital. Risk may stem, among other things, from price fluctuations, issuer insolvency, difficulties in selling assets, inflation, geopolitical events or an investor’s individual circumstances.
Which investments carry high risk?
High-risk financial instruments offer a high potential return but also a significant chance of loss. Examples include: small-cap stocks, which may have high growth potential but are more volatile and carry a higher risk of company failure, CFDs, which involve leverage that can amplify both gains and losses, and cryptocurrencies, which are highly volatile and have an uncertain future, making them risky but potentially highly profitable.
What are low-risk financial instruments?
Low-risk financial instruments offer lower potential returns but also lower risk of loss. Examples include government bonds, which provide fixed income through interest payments and carry minimal default risk. Some ETFs – especially those tracking broad market indices – also fall into this category as diversification spreads the risk across many assets. However, even low-risk instruments are not completely free from risk.