How much of my income should I save or invest?

If you are thinking about saving or investing some of your income, you’ve come to the right place! There is no set rule on how much to put away as the amount will really depend on your goals and financial situation. Read on to see how you can work out your goals and how to save for them. 

Investing is the best way to grow wealth over a long-time. If you started planning how to save and invest your income, you could achieve your financial goals! Investing is a great way to overcome inflation and makes your money work for you rather than letting it lie dormant in a savings account. Wondering how much money to set aside? Read on.

Some fun facts to get you in the mood…

  • 9% of Brits have no savings at all.
  • The average person in the UK has around £7,000 saved.
  • Only 3% of people in the UK invest in stocks and shares ISA.
  • 33% of Brits own shares.
  • 75% of millennial’s and gen Zer’s consider investing compared to 40% of the silent generation.
  • Most people (55%) invest due to the poor interest rates on savings accounts.
  • 73% of men consider investing compared to 61% of women.
  • On average, people hold their shares for 0.8 years.

Should I save or invest?

The answer is both! 

First of all it is good to get an understanding of the difference between saving and investing. Most people will do a mix of both as they can serve different purposes, but again this is all down to your personal circumstances and could be wildly different to anyone around you. 

Saving is the concept of putting money aside to save for something like a holiday or house deposit or in case of emergencies. Most saving involves putting your money into savings accounts held with a bank or building society. Most people save a portion of their money no matter how small, as it is a long-term way of purchasing things you want and making sure you aren’t living paycheck to paycheck. Putting your money in a savings account is safe, and having your money out of reach helps a lot of us actually stay disciplined enough not to dip into it!

Investing is using some of your money to grow more money –  to build profit. This may take the form of investing in stocks and shares or property. Typically, you should not invest money you are not willing to lose as there is a lot of risk involved in investing. Investing should be a means of growing your wealth but should not be relied upon. 

How do I decide how much to put away?

Set up an emergency fund that will cover around three months support – including rent, food and other essentials. By having a pot of money in case something goes wrong or life takes you by surprise you can be protected against the worst and give you the reassurance that you have three months to find another income source say, if you were made redundant. 

Save regularly to reach your goals. If your circumstances allow, saving at least 10% of your monthly income will help build up funds to spend on more expensive and infrequent expenses. This could cover anything from buying gifts at christmas to saving for a wedding or your first home. It is all about what you want to do in life. 

Pay off debt first. Not everyone is in the position to save, if you are under money pressure then deal with this first! There is no point saving for a holiday if you are building interest with unpaid credit cards. 

When is it better to invest rather than save?

How much you want to invest really depends on what your financial goals are over the short, mid and long term. I know it can be scary thinking 10 or even more years ahead, but you will thank yourself in the long run. 

Your short-term goals will cover what you want to do in the next few years and it is best to build up the money to do this in a savings account. Putting money into investments will reap a much greater reward than keeping it in a savings account. You should be aware however, that the interest you earn on savings will not match inflation rates. This means the buying power will reduce, if only a little.

Whereas, longer-term goals may benefit from you investing rather than saving. You should consider how much risk you are okay with. If you wanted to pay for a wedding in five years, how gutted would you be if you couldn’t because you lost all your money in a risky investment that didn’t pay off. It is typically safer to invest over long periods (10 years plus) when fluctuations in markets will be smoothed out and the growth of your initial investment will dominate. Over long time scales, investing will bring you a much greater return on your money and overcome the negatives of inflation that affects savings. Whether you invest in high growth stocks or sturdy-growing ETFs is up to you, but it is worth diversifying your investments due to the risk involved with investing in a single stock or commodity. 

GoalSituationSave or invest?
Buy a carIf your car is on the brink you will need to think about buying a new one soon!Save – you will need the money soon.
Go on holidayIf you enjoy holidays in exotic locations each year – consider the cost.Save for this summer and consider investing for the next few. Maybe you could afford the Carribean rather than Bognor Regis if you invest.
Put down a deposit for a homePerhaps in 5 – 10 years time you’d like to buy your own home.A mixture or save and invest. Your plans would be set back if you didn’t achieve this goal but you want to be able to achieve it as soon as possible.
Support childrenChildren are expensive and need supporting for almost 20 years. Similar to the above, it would be a disaster if you couldn’t support a family in the short to mid term, but perhaps investing to help support them flying the nest would work. 
Enjoy retirementThis might be close or very far off, consider if you want to retire early and what sort of retirement you want. Invest – you have a long time for your money to grow.

How much you invest will also depend on your income and your career prospects. If you’ve just started your own business and it will take five years to break even then investing would not be sensible at this point. But if you are jumping up your career ladder and don’t see yourself spending that much in the short to mid term then investing would be extremely beneficial. It is a spectrum after all – controlled by risk-appetite, situation and goals. 

Calculating how much to invest

Making a plan

  1. List and total up all your outgoings: rent, food, expenses, travel, paying off student loans or car payment plans. These are the things that you cannot avoid paying for. 
  1. Then list and calculate how expensive achieving your goals are and on what timescale, this could be: buying a car, buying a house, marriage, retirement. If you want to opt-in for a pension scheme, consider this here. 
  1. Next consider how much you currently earn and how much this might change over the future. What salary increase are you expecting? Will you share your income with your partner?
  1. Consider your risk appetite. Typical investments return 6.5% per year but this could be more conservative or high risk if you decide. 

Let’s use an example: 

  1. Say you have an annual income of £40,000 and live in London. Your rent, expenses and activities such as entertainment and holidays costs you half of your income. 
  2. You are in a relationship and are hoping to get a start-home together in the next five to ten years. You should then look at the likely cost of achieving your goal, whilst considering those that may contribute such as a parent or partner and account for inflation and rising house prices. You will share the cost with your partner, so for a £800,000 home, your half of the deposit will cost you £60,000 as you are a first-time buyer. You also want to put away 10% each month as an emergency fund
  1. You should also consider how your income may grow, if you are a high-achiever and are likely to be promoted regularly then you may see a salary increase of 10% a year – the average is 4% per year. You also use a retirement calculator that suggests building £700,000 in capital to retire at 68. This will mean saving £500 per month if you start at age 25. Most people need a retirement income of two thirds of their salary.  
  1. You want to invest with the typical risk which is 6.5% annual rate of return. You invest in various stocks with fairly low volatility. 

Income: £40,000, increase 4-10% pa

Essential expenses: £20,000

Goal: £60,000  deposit in 5-10 years

Outgoings: £6,000 pension, 9% salary on student loan

Investment return: 6.5%

How much to invest? 

If you invest the remainder of your income, you can afford your goal at the end of year 5!

YearSalaryExpensesOutgoings (student loan & pension)SavingsRemainder to InvestInvestment Worth

What rules are out there?

The rule of thumb is to invest 10-15% of your income.

The 50/30/20 rule suggests saving 20% of your income. With 50% for essentials, 30% for discretionary spending and 20% for savings. But this allocation is flexible depending on your income and expenses, where a high earner will have less than 50% for essentials, someone with dependents will have higher than 50% for essentials. If you’re in your 20s or 30s and can earn an average investment return of 6.5% a year, you’ll need to save about 20% of your income to gain the financial independence to actually enjoy life. 

The 4% rule states you could, in theory, use 4% of your savings to live on indefinitely. Following this rule means you need to save 25 times your annual expenses to support yourself. Sadly there are no risk free investments that give you 4% return and this also doesn’t consider changes to inflation. If you saved 20% of your income it would take you 41 years to be financially independent. 

% of Income SavedTime Required To Save 25x Annual Income
1%100 years
2%86 years
5%67 years
10%54 years
15%46 years
20%41 years
25%37 years
50%26 years
75%21 years
90%19 years

Start saving as much as you can until you are comfortable – then start investing. Remember investing just 1% of your income will return you 6.5% of it over one year. If you are in doubt, seek advice from a professional. 

If you are considering investing your money. Learn how best to invest with BullBear!

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