How much should I invest?

How much should I invest?

How much should I invest?

Are you investing enough to achieve your retirement timeline?

How much should I invest?

    There’s no one answer for how much to save or invest. Every person’s investing target is a function of their specific circumstances — how much they make, how much they spend, the lifestyle they want to have later in life, and how much they’re willing to sacrifice to attain it.

    But, regardless of where you are in your journey toward financial independence, it’s generally a good idea to save at LEAST 20% of your take-home income each year.

    If that number seems high, remember that saving and investing can take many forms. Of course, it can be traditional stocks, bonds, or ETFs, or it can be mutual funds purchased through an employer-sponsored retirement plan, like a 401(k). It can also include real estate, such as equity in a residence, rental property, etc.

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    Different experts recommend different rules of saving. Some push the 50/30/20 rule, and that can work for some people. Personally, I agree that most people will be well-served if they make it a goal to save at least 20% of their take-home pay each year (this works out to about 15% of their gross compensation).

    By saving a quarter or more of their income each year, people are doing themselves two big favors:

    1. They’re putting away a lot of money that can earn interest in the future
    2. They’re learning to live on only a portion of their pay, making it easy to pay their bills later if they experience an interruption in earnings

    But, by saving even 20% of their income, what most people are NOT doing is setting themselves up to achieve real financial independence within 20 years.

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    50/30/20 rule

    The 50/30/20 rule is common guidance for structuring a personal budget. It basically says that 50% of a person’s income each month should be used to pay for their needs, including housing, food, etc. 30% of their income should be used for wants, and the remaining 20% should be saved.

    As far as the strength of the rule, 50/30/20 is a decent guideline, but mostly as a baseline for people first starting out on their FIRE journey.

    For those who are serious about achieving financial independence, 50/30/20 should be considered a starting goal. From there, they should try to shift their spending away from wants, and then eventually from needs as well. This is done by lowering your cost of living or by reorienting your expenses (buying instead of renting). By buying a residence instead of renting, for instance, you can reclassify a portion of your housing costs each month from needs-based spending (rent) to savings (the principal portion of your mortgage payments.

    And, once you’ve really gotten focused on FIRE, your savings goal should probably be higher than 20% of your income. Instead of 50% being for needs, the first 50% should really be for savings, while 30% is used for needs and 20% for wants. This is when you’ll do most of your investing, whether it’s in stocks, bonds, real estate, or other alternatives.

    Having an emergency fund

    But, before you start investing, it’s first a good idea to build an emergency fund that you can tap if you ever need cash. If you ever have medical bills or unexpected home- or auto-related expenses, having an emergency fund can help you avoid accumulating large credit card balances as a result of these unforeseen expenses.

    It’s generally good to have three to six months of income set aside in a liquid account that you can access quickly. But, this really depends on your income and lifestyle, the potential size of costs you might incur without warning, how quickly you can cut other expenses if the need arises. Still, a few months is usually a good rule of thumb.

    As you build your emergency fund, it’s a good idea to have at least part of it in a bank account that can be accessed immediately if necessary. Once you’ve accumulated more than one month’s income, you might consider putting some of it in an investment account. If you go this route, be sure to use less volatile investments (such as mutual funds) and have your bank account linked to your investment account so you can get your money within seven to 10 days if you need it.

    Suggested Article: How Much Should You Have Saved for a Rainy Day? Use Our Emergency Fund Calculator

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    How much should I have invested at my age?

    Like anything else in personal finance, there is no hard and fast rule for how much a person should have invested at a given age. There are some general guidelines you should have SAVED at various ages, but how much of that should be invested is a different question.

    Note that this is the consensus according to several large financial firms. These firms have vested interest in you saving so that you’ll invest with them. But, just because you hit your target savings doesn’t mean you need to invest in mutual funds from Fidelity or T. Rowe Price. You could just as easily put the money in real estate or stocks.

    These numbers show how much harder it is for people to save when they’re young — most have student loans, their first car to buy, or want to save a down payment for a house. Many people have other bills or debts to overcome before they start saving. So, it’s OK if you’re behind — you can still catch up.

    If you're looking to do some planning, our friends over at Personal Finance Club have developed a calculator that is a fantastic resource for seeing how investments grow over time. You can use their Investment Growth Retirement Calculator to help determine how much you need to be investing based on your specific financial goals.

    How do I catch up?

    If you’re behind in saving, don’t give up. First, assess your circumstances. Determine whether you’re behind because of lifestyle creep, bad habits, or a lack of consideration for the choice you make.

    Here are a few things that can help you right-size your budget:

    • Increase your retirement plan contributions (bonus points for automating the contributions)
    • Cancel subscriptions and other luxuries
    • Freeze your spending (if you really want to be extreme, and then reintroduce spending intentionally)
    • Move into a cheaper house (or buy instead of rent)
    • Build new revenue streams

    Once you right-size your budget and are in a position to start catch up, there are plenty of ways to invest when you’re behind in your savings. Here are just a few suggestions:

    • A savings or money market account - These are boring, but safe and easily accessible if you need cash for any reason.
    • Employer sponsored retirement plan - Contributing to a plan like a 401(k) is a no brainer, especially if your employer offers a match. But, even if there’s not, it’s still good for reducing your tax bill.
    • Down payment for rental property - Saving up to invest in rental property is a great way to create a new stream of passive income and generate some new tax savings.
    • Equity in residence - If you buy a house and have a mortgage, the interest portion of your payments is tax deductible, while the principal portion increases your share of ownership in property. This is money you’ll have later if you ever sell the property.
    • A second residence - You can generate cash flow through a homeshare network like AirBnb to cover your costs of owning the house while you build equity in the property.

    A final word on how much you should have invested

    How much you should be investing is really up to you and your personal goals, but we hope that we have provided you with the necessary tools to set your goals and then figure out how to reach them.

    The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.

    Frequently Asked Questions:

    How much of my take-home income should I save each year?

    It's generally recommended to save at least 20% of your take-home income each year. This percentage serves as a good foundation regardless of your financial goals, helping you to build savings and invest in your future. Saving and investing a quarter or more of your income each year can significantly impact your ability to earn interest in the future and adapt to potential interruptions in earnings.

    What forms can saving and investing take?

    Saving and investing can encompass traditional stocks, bonds, ETFs, mutual funds through employer-sponsored retirement plans like 401(k)s, real estate investments, and even investing in further education to enhance future earning capacity. The best form of investment depends on individual circumstances, goals, and risk tolerance.

    What are some guidelines for structuring personal savings?

    While different experts recommend various rules, a common guideline is the 50/30/20 rule, which suggests allocating 50% of income to needs, 30% to wants, and 20% to savings. However, for those aiming for financial independence, it may be beneficial to adjust this allocation to prioritize saving and investing even more of their income.

    Why is having an emergency fund important before starting to invest?

    Having an emergency fund is crucial as it provides a financial safety net for unexpected expenses, such as medical bills or urgent home repairs. It's advisable to have three to six months of income set aside in a liquid account for emergencies. This helps avoid accruing debt from unforeseen costs and ensures you have the financial stability to continue investing toward your long-term goals.

    How can I catch up if I'm behind on saving and investing for my age?

    If you're behind on saving and investing, assess your spending habits and consider right-sizing your budget by increasing retirement contributions, canceling non-essential subscriptions, moving to a more affordable living situation, or building new revenue streams. Exploring various investment vehicles like savings accounts, employer-sponsored retirement plans, and real estate can also help you catch up and work towards achieving your financial goals.

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    Dock David Treece

    27 posts

    Dock is a former financial advisor and an experienced real estate investor who loves helping people find ways to build and conserve wealth. He has been featured by CNBC, Fox Business, and Bloomberg.