One of the most common things people ask when they start planning for their future is: How much of my income should I be investing?
If this sounds familiar, kudos to you for looking ahead. Investing not only helps you build wealth, but it also secures a nest egg for when it's time to retire. While you don't need much these days to start investing, the key is that you regularly contribute beyond your initial deposit so that you have more money to grow over time.
But just how much of your income should go toward investing? The sweet spot, according to experts, seems to be 15% of your pretax income.
Matt Rogers, a CFP and director of financial planning at eMoney Advisor, refers to the 50/15/5 rule as a guideline for how much you should be continuously investing.
According to the rule, 50% of your take-home pay should be allocated to essential expenses (housing, food, health care, transportation, child care, debt repayment), 15% of pretax income (including employer contributions) gets invested for retirement and 5% of take-home pay is used for short-term savings (like an emergency fund). This leaves 30% of your income that can be used for discretionary expenses, like entertainment and dining out, or more savings.
The 15% rule assumes investors start early in their career. A good place to begin getting to 15% is by making sure you are contributing enough to meet any 401(k) employer match, if your company offers one.
"If young workers struggle to achieve the 15% goal immediately, it's important for them to save as much as possible and increase contributions by one or two points as they earn more income," Rogers tells Select. Many employers will automatically increase your contribution annually, so look to see if that is an option for you.
Individuals can see how their budget stacks up against the 50/15/5 guidelines by using Fidelity's online savings and spending tool.
Consider a tax-advantaged IRA that lets you save on your own for retirement. With a traditional IRA, you delay paying any taxes until you withdraw funds from your account later in retirement. With a Roth IRA, you pay taxes upfront by contributing after-tax dollars and later in retirement your withdrawals are tax-free (as long as your account has been open for at least five years).
Those who expect to be in a lower tax bracket when they retire should consider a traditional IRA, while Roth IRAs are better suited for those planning to have more income (and a higher tax rate) when they retire.
Some of the best IRAs and best Roth IRAs are those offered by Charles Schwab, Fidelity and Betterment. They each provide a variety of investment options and have educational resources or tools to help you invest for your future.
'Begin with the end in mind'
While 15% seems to be the benchmark of how much to invest, the reality is it really depends on your end goal.
"How big are your dreams?" says Alex Klingelhoeffer, CFP and wealth advisor at Exencial Wealth Advisors. "When you start a project — and investing is a long, long project — it's almost always helpful to begin with the end in mind."
Think about what matters to you and what you expect to get out of an investment. Picture what kind of retirement lifestyle you want: Do you want to downsize or buy another home?
"I have clients that have a general sense of when they might like to buy a retirement home," says Klingelhoeffer, who recommends a saving and investing rate of 10% to 20% (including any employer match). "I have others that seem to have every dollar for the next 20 years budgeted. Everyone has a different process, but starting with the end result can help you figure out how much you need to put towards a goal today."
As you think about why you're investing, consider a platform that can help you visualize your goals. For example, users of robo-advisor investment platforms like Betterment and Wealthfront can receive personalized savings plans that are calculated based on their indicated investment time horizon, risk tolerance and projected return of their recommended investment portfolio.
Wealthfront
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
Bonus
None
Investment vehicles
Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
Educational resources
Offers free financial planning for college planning, retirement and homebuying
Terms apply.
Betterment
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
Investment vehicles
Robo-advisor: Betterment Digital Investing IRA: Betterment Traditional, Roth and SEP IRAs 401(k): Betterment 401(k) for employers
Investment options
Stocks, bonds, ETFs and cash
Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Bottom line
The first step to investing is identifying your goals for the future. Next, making sure you're putting away 15% of your pretax income each paycheck; this is generally a good road map to follow and will help you stay on track for retirement.
Remember that investing is a marathon, not a sprint. If you can't afford to meet the 15% threshold today, try upping your investment contribution each year until you get there.
