Trying to figure out how much salary you should invest in each month? Fast internet searches may confuse you rather than be confident.
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The truth is, there is no answer of a size, but financial experts say there are smart guidelines anyone can follow based on their income and long-term goals.
Rick Miller, financial planner and investment advisor at Miller Investment Management, said that if your employer offers a 401(k) plan, the most basic rule of thumb is to invest at least the position you receive in the entire race. While this amount may vary, it is usually between 5% and 8% of your income, at most a cap, which is essentially “free” money.
He noted that for amounts above that level, you'd better invest outside of 401(k) or similar investments outside of the plan, as the minimum allocation (RMD) rules are required in the future, which forces you to withdraw funds. Your RMD withdrawal is 100% taxable as income.
“Employer programs help because they can remove some checks from your checks for each salary, so they create discipline for you,” Miller said.
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Whether you have an employer competition or not, James Comblo, Certified Financial Trust and CEO of FSC Wealth Advisors, said that following the classic 50/30/20 framework (50% demand, 30% demand, 20% savings/investment), your total savings and investments will be close to 20%.
“Then, when you consider income, age, debt and goals, that number may shift. For higher earners, the goal should be to push more than 20% of people, especially when their lifestyle is under control.”
Comblo also prefers non-traditional budgets rather than paying the bill first and investing in what’s left, “You start with a long-term goal, determine the amount you’ll invest first, and create a spending plan around that plan.”
Miller urges if you are just starting to invest, start with ETFs (exchange-traded funds). “The cost will be super low and limit yourself to extensive exposure to index funds.”
While it’s hard to imagine your salary being overpaid, a key sign is “if you find that consumers have increased debt,” Miller said, then it may be time to dial back your investment amount to equalize cash flows and minimize interest expenses.
