How Much Of Your Income Should Go Toward Investing?

It’s common knowledge that investing is the cornerstone of creating wealth, reaching long-term financial goals, and retiring comfortably. Yet, deciding on the right amount to allocate from your income is up to interpretation.

Some experts recommend investing as much as possible, while others offer simple mathematical formulas. While investing is seemingly simple, much goes into choosing the right income portion.

How Much of Your Income Should You Invest?

Experts or analysts see the sweet spot as 10–20% of your earnings after tax. This conservative ballpark figure caters to the average person’s financial circumstances and risk profile.

The 10–20% range fits well with the well-known 50/30/20 budgeting formula. This model helps individuals manage their funds in the most balanced way, accounting for expenses, savings, and discretionary spending.

The 50/30/20 principle suggests allocating:

• 50% of your income on needs and obligations (i.e., accommodation, transport, debt, utilities, food, healthcare, insurance).
• 30% of your income can go towards wants, luxuries, or non-essentials.
• 20% of your income should be set aside for savings and investments.

Another popular method is the 50/15/5 rule by Fidelity Investments. The model is similar to the 50/30/20 rule, suggesting directing half your income toward non-negotiable expenses. However, it’s unique in its focus on retirement, which long-term investing aims to achieve, and short-term savings for emergencies.

According to Fidelity, 15% of your income should go towards investing for retirement, which can include having a diversified investment portfolio. A further 5% can be allocated for short-term savings or, more specifically, an emergency fund. The remaining 30% would be for discretionary spending.

Steps To Determine How Much to Invest

Of course, the calculations mentioned above are only guides. Thus, deciding on how much income to invest should be individual-specific. Some people can allocate less than the recommended 10-20% percentage, while others could distribute more.

Let’s review the steps to dictate how much investable income is within your comfort zone.

Understanding your current financial situation

Each person’s financial profile will differ based on numerous factors before investing.

• Taxed income: Investing should always account for after-tax earnings for a more accurate calculation.
• Debt: Eliminating debt (if any) is crucial in freeing up as much disposable income as possible.
• Emergency and rainy day funds: It is recommended that investors save at least three to six months of basic living costs for emergencies. Furthermore, investors should have money set aside to cover sudden but rare major financial events.

After subtracting the numbers linked to these elements, you’ll be left with what you can potentially begin to invest.

Investment Strategy

The first part of determining your investing strategy is having an end goal. This requires a deep look at your motivations for choosing this path. Is it for buying a high-ticket product? Having children? Retiring? Passive income? Or a mix of different goals?

One should also have an amount they hope to earn from investing after a certain period that aligns with their ultimate objective.

Next, what is your investment timeline? Potential investors can decide how long they plan to invest based on their desired figure and long-term goal. Knowing the time frame will help them pick the right investable asset and schedule.

The next part of your investing strategy is knowing your risk tolerance. After all, investing comes with the potential for financial loss. However, as stated earlier, some investors may be inclined to invest more of their income than recommended.

Your risk tolerance will depend on several elements, such as whether you are actively or passively investing. Active investing is generally riskier but can offer the most financial reward. Meanwhile, passive investing is less risky but generally less lucrative.

Having Achievable Investing Goals

Here are the common goals that investors aim to attain:

• Retirement: It has become increasingly challenging to retire. Many people will not consider the reality of retirement for several decades until the time comes. Yet, it’s a worthy goal to accomplish. The sooner you begin, the less you’ll worry about working as you age. Moreover, you will benefit from the highest compound growth.
• Buying a home: This is often the highest financial burden for the average person. Investing can help with your down payment or supplement mortgage costs.
• Having children: Another long-term financial commitment, having children requires proper planning, whether to maintain their expenses or save up for their future endeavours.
• Earning passive income and living comfortably: Some people invest to earn passive gains and simply have more cash in the bank. Also, investing can aid in upgrading their luxuries or lifestyle.

Choosing Where To Invest

So, you’ve examined your present financial circumstances, investment strategy, and goals. All that’s left is to decide where to direct your hard-earned money, a decision that shouldn’t be taken lightly.

Below is a list of the go-to investments (in no order of importance) you can review, with the ability to allocate your income in a diversified portfolio.

Stocks

Experts have long regarded stocks or shares as relatively safe long-term investments due to their stability, dividends, regulation, and market size.

Charting platforms like TradingView can help navigate the multi-layered arena of stocks by picking the best companies or stock indices to invest in.

Bonds

Bonds fall into the category of conventional investments like stocks. Unlike equities, they are less volatile and offer more predictable income.

Alternative Investments

Lastly, alternative investments refer to financial assets outside traditional investments. The broad scope includes cryptocurrencies, hedge funds, real estate, commodities, venture capital, hedge funds, art, collectables, etc. Analysts regard these investments as having the highest risk (but highest reward) and often a more significant barrier to entry.

Bottom Line: Prioritizing Investing

In the modern world of uncertain economic conditions, investing has become more crucial than ever. While you can follow a conservative allocation, like 10–20% of your income, it never hurts to invest more within reason.

In addition to finding the most suitable percentage, investing requires more considerations, including a strategy, goals and choosing the best asset class.