What Percent of My Income Should I Save or Invest?

When considering saving and investing, you must first familiarize yourself with several important terms, and then consider how much to set aside.

The amount you save or invest will vary, depending on your current situation and future needs. You'll have to first decide if you need to set two different numbers: one for saving and one for investing. You'll also need to evaluate whether you are in debt and whether you have an emergency fund (or want one). There are, however, a few basic rules of thumb when it comes to deciding the percentage of income to save or invest.

Ten Percent Rule

Most experts agree that for wise financial planning, at least 10 percent of your income should go into savings and/or investing. Of course, this means you'll still need to allocate a percentage saved versus a percentage invested, but in general, this rule says to make sure there is 10 percent you are setting aside and not spending.

Forty Percent Rule

While 10 percent of your income may seem steep to some, many financial experts advise that this is the minimum to invest for the future and that you should, when possible, invest even more than that. One popular theory recommends you try to keep your monthly expenses to 60 percent of your salary and then use the remaining 40 percent for achieving financial goals.

Some of this 40 percent can be put into short term savings and some into long term savings or investment goals, such as retirement funding. The right allocation really requires you to visit a financial planner and to outline your own specific goals as to when you want to retire and whether you have short term things to save for, like a house down payment or a new car.

Emergency Fund First Rule

Other financial experts advise that you do not begin investing any portion of your income until you have cash savings that equals between two and six months of your current salary. Such savings can be critical for emergencies and to prevent the accumulation of debt, which can cripple a sound investment strategy.  

You need to take a close look at your particular situation, have a good amount of cash reserves, and generally bank on at least 10 percent of your income going into savings of some form.

Saving Versus Investing

Once you've decided on a percentage of your income to put aside, then you need to actually decide what to "save" and what to "invest." Saving generally means you simply aren't spending it- it might be in a savings account or even in your checking account- while investing means you are putting it into a specifically chosen investment that is designed to grow.

Deciding how much to save versus how much to "invest" really depends on a variety of factors. If you have some money set aside to invest, you may want to ask yourself the following questions:

• How often do I need to touch it? Will I need to dip into these funds, at least sometimes? If so, you may need to consider the various options available to you with more ability to withdraw the funds such as money market accounts. These types of accounts are liquid, meaning it is easy to get to your cash when you need it.
• How much do I hope to earn on this money? Having liquidity often comes at the price of income earned in interest. Savings accounts, and some of their longer-term relatives, offer low interest, while some investment strategies can earn you much more over time.
• What is my tolerance for risk? Can you handle short-term losses on the stock market, and stick with your overall investment strategy? Or are you more likely to sell everything and stick it under your mattress at the first hint of trouble? If the latter sounds more like you, you may want to do your homework and get sound advice before delving into investments.
• What services do I expect? Savings and investments involve varying levels of financial services. To purchase certain investments, you may need to work with a broker, or at least consult with a professional through a self-help investing site. On the other hand, savings accounts can be opened in a bank, credit union or savings and loan.