Investment is a very important financial factor in our life and it ensures whether we would have financial freedom after retirement. Regardless of your income, you must have an investment plan based on your future goals. Having an investment plan help you remain on your future goals as well as gives you a financial target. Investment is one of the easiest ways to create wealth but sometimes people find it a bit difficult to decide what percentage of their income they should invest for the future.
There is no exact percentage that you have to invest from your income. According to many experts, 6-10% is a good number for future investment from your income. However, the actual percentage depends on your overall income, expenses, and future goal. If you are planning to have your own house and car by the age of 35 then you have to save and invest as much as you can so that you can reach your goal. If you are able to invest 10% to 15% of your income then it is considered excellent.
First, Set Your Goals
Before, deciding what percentage of your income you should invest, you must set your goals. Setting your future goals will help you understand how much money you will need after your retirement to complete your goals. Or, at the age of 30, you might have several goals like starting a family, having children, etc. If you have a moderate salary then there are lots of things you can achieve. However, with time your salary will increase so you should not let your current income constrain your goals. You have to think clearly and set up your investment plan for future goals. Depending on your salary, expense, and future goal you can invest at least 6-10% of your income.
Set A Spending Plan
If you want to invest money from your income then you have to set a spending plan and save money for investment. People make various mistakes while creating a spending fund. Many people determine their savings amounts around their monthly expenses which is a very common mistake. Because, monthly expenses are not certain, sometimes it is less and sometimes you might have more expenses than the regular one. So, if your investment target is $500 per month then this will be your first expenditure. This is a very easy method because you can set up an automatic deduction from your paycheck for a qualified retirement plan. This way you don’t have to think about what is your monthly spending or what is your spending plan.
What Percentage Of Your Income Should You Invest?
Madison Sharick, CFA, CFP, manager of financial planning at PNC Investments said –
“Once you’ve established an emergency fund and paid off any high-interest rate debt (like credit cards), you should look to invest about 10 to 15 percent of your income. If you can’t invest that amount now, don’t let it prevent you from getting started, even small amounts invested consistently can grow meaningfully over long periods of time.”
So, it means regardless of your income or present financial condition you should start investing money from your income if it is as low as $100. For example, you can easily get started with investing in your employer’s retirement plan. If you enrollee for an employer’s retirement plan then a small percentage of your income will be automatically deducted from your paycheck and put into the investment. Or, you can open an online investment plan by yourself and invest a small amount of money every month from your income. If you can put aside a handsome amount of money from your income then you can consider other investment accounts, like mutual funds, stocks, bonds, etc. If you don’t have a fixed income then tries to invest as much as you can after all the expenditures.
How To Decide What Percentage Of Income You Should Invest
There are many ways; you can easily decide what percentage of income you should invest. But everything comes down to your future financial goals. For example, if you want to retire with your own house/apartment and cars then you have to invest much more of your income compared to if you want to retire in a rental flat. Here are some ways to decide the income percentage –
Method 1: Work Backwards From the Amount You Want
Method 2: Invest Everything after the Emergency Fund
Method 3: Fixed Ratios
Method 1: Work Backwards From The Amount You Want
This is the most common method and most people use this method to determine the amount they need to invest from their salary. In this method, first, you have to decide how much you want to save for the future. Then, you work backward from this amount. For example, you want to income 2,000/month after your retirement and you want this amount from age 65 to 80. So, you will need $24,000/year and $360000 for at least 15 years. Assuming you are 30 years old now so you have at least 35 years to manage $360000. So, if you are able to set aside $10285 a year ($858/month) then you will be able to reach your future goal in about 35 years.
Method 2: Invest Everything After The Emergency Fund
In this method, you won’t have a certain amount to invest per month. If you want to apply this method then you must have to follow a strict monthly budget to save as much as money you can from your income and then invest that amount. Moreover, you have to create an emergency fund by saving at least 20% of your income. Once you have a solid emergency fund of at least six months of your income then you can invest 20% of your income on mutual funds, blue-chip stocks, index funds, etc.
Method 3: Fixed Ratios
This is more of a traditional approach to deciding the percentage of income that you can invest in the future. In this method, you fix ratios to save and invest. Usually, the ratio is 20% of your pay for savings and 15% for investing. This method doesn’t require much planning. However, you have to consider your total income, total monthly cost, and other costs before fixing the ratio.
FAQs About What Percentage Of My Income Should I Invest?
What Is The 70-20-10 Money Rule?
The 70-20-10 rule is the percentage breakdowns for spending, saving, and sharing money. So the 70-20-10 money rule means you should spend only 70% of your income and save 20% of your income. Finally, you donate at least 10% of your income per month.
How Much Money Do I Need To Invest To Make $1000 A Month?
This is a very tricky question and there is no exact answer to this question. How much money you would need to invest to make $1000 mostly depends on what type of investment you have made. For example, if you assume that you will get at least 1% of your investment per month then you have to invest at least $100,000. If the percentage is 10% then you have to invest $10,000.
What Is The Best Investment For Monthly Income?
There are many investments available for monthly income. For example –
1. Certificate of Deposit
2. Short Term Corporate Bonds
3. Long Term Corporate Bonds
4. International Bonds
5. US Treasury Bonds Bills and Notes
6. Municipal Bonds
7. Floating Rate Funds
8. Money Market Funds
9. Dividend-Paying Stocks
11. Master Limited Partnerships
12. P2P Lending
13. Real Estate Private Lending
14. Real Estate Notes
15. Commercial Rental Property
16. Residential Rental Property
17. Timberland and Forestry
18. Business Development Companies
19. Preferred Stock
20. Royalty Income Trusts
What’s The 7-Day Rule For Expenses?
The 7-day rule for expenses is “you give yourself a cooling-off period” of 7 days before making purchases above a certain threshold, say $100.” This is an excellent rule to avoid impulse spending and buyer’s remorse.
Which Is The Best Stock To Invest Money In?
There are many stocks available that pay handsome dividends. They are –
1. Franklin Resources
2. Walgreens Boots Alliance
3. AbbVie Inc.
4. Federal Realty Investment Trust
5. People’s United Financial
6. Chevron Corp
7. AT&T Inc.
8. Exxon Mobil Corp.
How Much Will I Have If I Save $100 A Week?
We know that 52 weeks is a year. So, if you save $100 a week then you will be able to save $5200 a year. If you continue the savings for at last 30 years then the total amount will be $1,56,000.
What Are The 3 Rules Of Money?
The three golden rules of money are –
1. Don’t spend more than you make
2. Always plan for the future
3. Help your money grow
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.