How Much of My Income Should I Invest?
Investing is a great way to start building long-term wealth, but have you ever wondered if you’re investing enough to achieve your financial goals? Everyone’s financial situation and goals are different and there is no one-size fits all answer for how much of your income you should be investing. Factors such as how much money you make, how much money you spend, your retirement age and lifestyle all account for how much you may be able to invest. Generally, financial experts recommend you invest between 10%-20% of your take-home income per year in 401(k), IRA and other assets. But as mentioned, your current financial situation and goals may dictate a different plan. Here are some ideas on how you can determine how much of your income you should invest.
Use the 50/30/20 Method
Many people follow the 50/30/20 method of budgeting in order to achieve their investment and savings goals. The 50/30/20 method simply states that you should divide your post tax income with 50% used to pay for needs, including housing, food and other necessities. 30% should be used for wants including entertainment and travel, and the remaining 20% should be saved each month. The 20% that’s allocated for savings can be spread across short-term savings goals, such as building an emergency savings fund, or for long-term goals like investing for retirement. Once you’ve done the math on 20% of your take home income, set up automatic transfers to your savings account or IRA account. Not only is this a great tool for getting your budget on track but it allows you to shift your spending away from wants and prioritize where you’d like that money to go.
Employee Sponsored Plan
One of the most common and easiest ways to save for retirement is through an employer sponsored retirement plan if you work for someone else and it is offered. Typically, it’s a 401(k) or 403(b). Regardless of the type, these are great vehicles for investing. Of course, the same question should still be asked; how much should I contribute to my employee plan? If your employer matches your contributions, you should seriously consider contributing at least enough to get the maximum match amount. A typical match might be something like dollar for dollar up to 3%. Early in your career when you likely will be making less money, you may settle for a smaller contribution amount of about 6%, but over time, you should consider increasing your contribution in order to grow your nest egg for retirement. Many people will get to a point where they are contributing 10% + to their employee sponsored retirement plan. Keep in mind, the earlier you start investing, the longer that money has to grow.
Don’t worry if you got a late start on your savings goals. There are very favorable contribution policies for those who started their investing later in life. For example, for those over 50 years of age are allotted catch-up contributions up to $6,500 in 2022. Visit the IRS website to learn more about contribution limits and options for those over 50. The good thing is, late savers are generally further along in their career and at peak career earnings which can allow for greater contributions.
Chances are your financial situation will change over the course of your career with pay raises, bonuses, job changes, etc. Because of this, your investment plans should change as well. Strive to set aside more money year-over-year to account for inflation and changing retirement support systems such as social security. As a rule of thumb, saving too much is never a bad idea as you can always tap into your money if needed. If you save too little, the money is just not there when you need it. Establish a behavior of investing often and early with annual reviews to meet your retirement goals.
How much you should be investing is really up to your personal and financial goals. Most should follow the traditional plan of contributing between 10%-20% and make changes as you progress along your career. Continued contributions, reviews and assistance from a financial advisor will set you up for success in your retirement.
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