How Much Should You Invest? Experts Recommend at Least 15% of Your Income

Many people ask the question: “How much should I invest?” It’s a tough question because everyone’s financial situation, goals and risk tolerance is different. But financial experts agree on a rule of thumb that applies to most people: you should invest at least 15% of your income. But what does that mean and how can you apply it to your life?

In this guide, we’ll go through the factors to consider when deciding how much to invest, the reasons behind the 15% rule and give you practical examples to put it into action.

Why 15% of Your Income?

Here are the reasons why 15% of your income is an important rule for building long term wealth. 💸️

1. Compound Growth

Investing 15% over a long period of time gives your money the opportunity to grow exponentially through compound interest. Compound interest means you earn returns on your original investment and on the interest accumulated over time. For example, if you start investing $500 a month at 25 and do so until you’re 65, with a 7% return, you’ll have over $1.3 million.

2. Balances Present and Future Needs

Investing 15% allows you to save for the future without sacrificing too much of your current lifestyle. For example, let’s say you make $70,000 a year. 15% would mean setting aside $10,500 a year. That leaves you with $59,500 for living expenses, entertainment and other financial goals.

3. A Buffer for Retirement

The ultimate goal of investing is to build a nest egg for retirement. Investing 15% consistently allows you to build a big enough sum to feel financially secure during your retirement years. Imagine someone who starts investing 15% of their $80,000 salary from 30 until 65, with a 7% average return. They’ll have around $1.7 million.

Key Factors to Consider When Deciding How Much to Invest

The 15% rule is a good starting point but your individual circumstances may require more or less. Here are the key factors to consider when deciding how much to invest.

1. Age and Time Horizon

Your age will play a big part in how much you should invest. The younger you are the more time your investments have to grow, so you can start with a lower percentage and increase as you earn more.

• 20s: You have time on your side so even 10-15% can grow big. If you can invest more go for it! The earlier you start the more compounding has.
• 30s and 40s: If you haven’t been investing consistently now is the time to aim for at least 15-20% of your income. You’re in your earning prime so investing as much as you can will help catch up for lost time.
• 50s and Beyond: If you’re closer to retirement and haven’t saved much you may need to invest 25-30% or more of your income to build a big enough nest egg. You may also need to consider working longer or adjusting your retirement expectations.

2. Income and Expenses

Your income and expenses will play a big part in how much you can realistically invest. Someone earning $100,000 per year will have a different capacity to invest 15% compared to someone earning $40,000.

If you have a high income but high expenses (e.g. mortgage, car payments, childcare costs) you may need to start with a lower percentage and increase as your expenses decrease.

3. Financial Goals

What are your long term financial goals? Are you saving for retirement, a house, your children’s education or all of the above? Your goals will determine how much you need to invest.

If your main goal is retirement you can stick to the 15% rule. But if you want to achieve financial independence early, you may need to invest 20-25%.

4. Debt Load

If you have a lot of debt, it’s better to pay off high interest debt before investing heavily. High interest debt like credit card debt can eat into your growth. But this doesn’t mean you should ignore investing altogether. Even investing 5-10% while paying off debt will keep you on track.

5. Risk Tolerance

Your risk tolerance – how much risk you’re willing to take – will impact your investment strategy and returns. The higher your risk tolerance the more aggressive you can be and potentially invest a lower percentage and reach your goals. If you’re risk averse you may need to invest more to compensate for lower returns.

Get Started

Now that you know what to invest, here are some practical steps to get started. 💸️

1. Set up Automatic Contributions

If you can’t set aside money each month, set up automatic contributions to your investment accounts.

For example, if you get paid weekly, set up an automatic transfer to move 15% of your take home pay into a retirement or brokerage account.

2. Start Small and Increase Over Time

If 15% is too much, start with a smaller percentage 5% or 10% and increase it by 1% each year. Many employer sponsored retirement plans have automatic escalation features that increase your contribution rate over time.

3. Use Employer Matches

If your employer offers a 401(k) match, contribute at least enough to get the match. This is free money that can add up to big time growth.

For example, if your employer matches 50% of your contributions up to 6% of your salary, contribute at least 6% to get the full match. Not using this is essentially leaving money on the table.

4. Use Different Investment Accounts

Use different investment accounts to maximize your tax benefits. For retirement, use a mix of 401(k)s, Roth IRAs and traditional IRAs. For non-retirement goals, use brokerage accounts or specialized accounts like 529 plans for education savings.

Each account type has its own rules, tax benefits and use cases. For example, a Roth IRA grows tax free and allows tax free withdrawals in retirement, so it’s great for younger investors.

5. Review and Adjust Annually

Life changes so should your investment strategy. Review your situation and goals annually to adjust as needed.

For example, if you get a raise, increase your investment percentage. If your family grows or your expenses change, review your plan to make sure you’re on track.

How Much Should You Invest for Specific Goals?

The 15% rule is for retirement, but what about other goals?

• Retirement: 15% of your income, 20-25% if you’re starting late.
• Buying a House: Save at least 20% for a down payment.
• College Savings: save 5-10% of your income.
• Financial Independence: If you want to retire early, you’ll need to invest 30% or more of your income depending on your timeline and lifestyle.

Final Thoughts

Deciding how much to invest depends on your situation, goals and preferences. 15% is a good rule of thumb for most people but it’s not set in stone. It isn’t just about numbers, it’s about building the life you want in the future and enjoying the present.

Just start investing as soon as you can and adjust as your situation changes.

Now go! 😉

More Resources

Thank you for reading our guide to how much you should invest. We also recommend the additional resources below.

• Saving and Investing Tips for Beginners: A Complete Guide
• How to Invest Your First $1000: 10 Best Investments for Beginners
• How to Use Dollar Cost Averaging to Build Wealth
• 5 Basic Financial Ratios Every Investor Should Know