How Much of Your Income Should You Invest?
One of the smartest money moves you can make is investing your money. But why do so many financial experts recommend doing this? "Investing is a way to put your money to work on your behalf," explains Madison Sharick, CFA, CFP, manager of financial planning at PNC Investments. "It provides you with the opportunity to grow your assets, generate income, and help your hard-earned savings keep up with inflation."
You don't need to be wealthy to begin investing, either. So, how much of your income should you set aside for this financial endeavor? Here, we asked Sharick for the simplest answer.
First, it's important to understand why you should invest at all.
The main reason that people invest their money in the first place is to have it on hand for living expenses or emergencies. "Investments compound, which is to say they grow exponentially over time. Think of it as a positive snowball effect. The longer the runway, the bigger the snowball grows, and the more snow it picks up as it rolls," says Sharick. "The same is true with your investments. As your portfolio grows over time, you're not just earning on the amount you contributed—you experience growth on your growth! That's why small amounts invested sooner often have greater benefit than relatively larger amounts invested later in life." In other words, these small amounts, such as a retirement account, can still make a big impact on your future finances.
What percentage of your income should you invest?
"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," says Sharick, who adds that the amount you can invest will vary depending on your individual situation. "If you can't invest that amount now, don't let it prevent you from getting started," she says. "Even small amounts invested consistently can grow meaningfully over long periods of time."
You can get started with investing in your employer's retirement plan, if one is offered. A small percentage of your income is automatically deducted from your paycheck and put into the investment, and employers also often match the contribution percentage to help increase your retirement savings. "If an employer plan isn't an option, don't worry," reassures Sharick. "It's incredibly simple to open an investment account on your own online and set up automated contributions into a diversified portfolio." Talk to your bank about the retirement investment options that they offer.
And, of course, if you have more money that you are able to put aside, you can consider other investment accounts, like mutual funds, stocks, bonds, or even in real estate. The vehicle that you choose for your investments depends on your goals and how soon you would want to be able to liquidate (or be able to use) the money that it earns.