Ask the Expert: How Do I Determine What Percentage of My Savings Should Be Invested?

Dear Ask the Expert: How Do I Determine What Percentage of My Savings Should Be Invested?

Saving and investing are both parts of a healthy financial plan.  But how much of your savings you should be investing varies based on your financial goals and risk tolerance, which in turn are based on what stage you are in your life cycle (e.g. early career or close to retirement). 

Saving and investment must be considered as part of the wider plan of managing your income and expenses.  One popular approach to managing your expenses is the 50/30/20 rule.  In this simple framework:

• 50 per cent of your income is allocated for essential needs like rent, food, utilities, insurance, and other unavoidable expenses.
• 30 per cent is reserved for discretionary spending—things like dining out, entertainment, and non-essential purchases.
• The remaining 20 per cent should go toward savings and investments. This includes both short-term savings (emergency fund) and long-term investments (such as retirement accounts or other investment portfolios). Before investing your money, ensure you have an emergency fund. If you have an adequate emergency fund, excess savings can be used to invest.

While the 50/30/20 rule provides a general guideline, let’s focus specifically on the investment portion. Generally saving and investing around 10 per cent to 20 per cent of your income is recommended. However, the more practical answer is to invest whatever amount you can afford. How much to invest depends on your current financial situation and your net pay/income level.  Calculate your net pay/income (after taxes, NIS etc.) and see if consistently investing 10 per cent  to 20 per cent of that amount is feasible. I use this approach to help me decide how much to invest.

Here are some calculations to show what amount to invest across different net income levels:

Remember that your specific situation matters. Investing a lot right away may not be best for you given your current financial situation. Consider your risk tolerance, lifestyle, and other financial goals when deciding on investment levels.

Lydia R. McCollin, FCCA, FCA, is the Managing Director of LRM Consulting Services Inc.

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