How Much of Your Income Should Go Toward Investing?

Traditional Investments

When you are investing in any asset, you should look for a long history of returns from that investment.

You want to make sure you’re choosing an asset that has been making people money for decades, if not centuries.

While you may not see these returns every year, you want to make sure your investment is consistently generating returns over a long period of time, which is one of the cons of new age investments.

While they are exciting, these options have a very limited operating history compared to old school investments like stocks and bonds. 

The Stock Market

Let’s take the stock market for example.

The stock market has been making people rich for over 100 years, creating billionaires like Warren Buffet.

Long-term buy and hold investors can expect an average 10% return from the stock market over time, based on the S&P 500.

It is important to understand, however, that 10% might not be your experience every single year.

Some years you could yield a 15% return while others could see a loss of 20% or more.

Higher risk investments like stocks are going to have more volatility and fluctuations with the price. 


Pros and cons of saving

Relative to investing, saving offers three advantages:

Pro: Cash doesn’t change in value. Your savings account balance doesn’t fluctuate in response to external factors. The stock market could lose 50% of its value in a day, and your savings balance won’t change.

Pro: You can use your savings immediately. Cash is liquid. That means you can use it directly to buy things, pay bills, and repay debts. You can’t “spend” stocks and bonds. You must convert them into cash first.

Pro: Saving enables you to invest. You cannot invest unless you’ve saved first. This is true on two levels:

  • To invest in the stock market, you must deposit cash into a brokerage account. You then use that cash to buy securities. The first step of depositing the funds is an act of saving.
  • The best practice is not to invest unless you have a cash savings balance. If an emergency pops up, you’d use your cash to cover the expense. This protects you from having to sell your investment assets before they’ve appreciated.

Saving has two disadvantages relative to investing.

Con: Savings provide negative returns after inflation. The spending power of cash does decline over time. This is due to rising prices, also known as inflation.

A normal inflation rate is 2% annually. At that rate, $100 cash on Jan. 1 will only buy $98 worth of stuff by year’s end.

Inflation is the reason you’d hold cash in a high-yield account versus a checking account or under the mattress. The interest helps offset inflation. For example, 2% inflation nets to 1.5% if you’re earning 0.5% on your savings balance.

Con: Savings returns are lower than investing returns. You need cash on hand for emergencies, but there’s a cost to that beyond the negative real returns. When you hold cash, you’re forgoing the chance to invest and earn inflation-beating returns.

Image source: Getty Images.

Image source: Getty Images.

Create a Spending Plan

The mistake many people make when creating a personal spending plan is they determine their savings amounts around their monthly expenses, which means they save what they have leftover after expenses.

This invariably results in a sporadic investing plan, which could mean no money is available for investing when expenses run high in a particular month. People who are intent on achieving their goals reverse the process and determine their monthly expenses around their savings goals. If your savings goal is $500, this amount becomes your first expenditure.

It is especially easy to do if you set up an automatic deduction from your paycheck for a qualified retirement plan. This forces you to manage your expenses on $500 less each month.

Moderate Growth

If you want to target a long-term rate of return of 7% or more, keep 60% of your portfolio in stocks and 40% in cash and bonds. With this mix, a single quarter or year could see a 20% drop in value. It is best to rebalance about once a year.


Retirement is the ultimate long-term savings goal.

Now back to the original question: How much should you save a month? Let’s break this down by goal:

Schwabs suggested allocations and withdrawal rate

Schwab's suggested allocations and withdrawal rate

Planning time horizon Asset allocation Initial withdrawal rate (for a 75% to 90% confidence model) Planning time horizon 30-years Asset allocation Moderate Initial withdrawal rate (for a 75% to 90% confidence model) 3.4% to 4.1% Planning time horizon 20-years Asset allocation Moderately Conservative Initial withdrawal rate (for a 75% to 90% confidence model) 4.9% to 5.4% Planning time horizon 10-years Asset allocation Conservative Initial withdrawal rate (for a 75% to 90% confidence model) 9.6% to 9.9%

Source: Schwab Center for Financial Research. Initial withdrawal rates are based on scenario analysis using CSIA’s 2022 10-year long-term return estimates. They are updated annually, based on interest rates and other factors, and withdrawal rates are updated accordingly. 1  Moderately aggressive removed as it is generally not recommended for a 30-year time period. The example is provided for illustrative purposes. Source Schwab Center for Financial Research. Initial withdrawal rates are based on scenario analysis using CSIA’s 2022 10-year long-term return estimates. They are updated annually, based on interest rates and other factors, and withdrawal rates are updated accordingly. 1  Moderately aggressive removed as it is generally not recommended for a 30-year time period. The example is provided for illustrative purposes.

Paula Pant

Paula Pant is a personal finance journalist who has been featured on MSN Money, Bankrate, Marketplace Money, AARP Bulletin, and more.

TIAA has sponsored this post for information purposes only. Paula Pant is not affiliated with TIAA, and TIAA makes no representations regarding the accuracy or completeness of any information on this post or otherwise made available by her. Ms. Pant’s statements are solely her own and are not endorsed or recommended by TIAA.


The conundrum: By the time you’ve reached your forties, you should have a good amount saved for retirement. Ideally, according to investment firm Fidelity, you should have socked away three to four times your annual salary by now. In reality, the average 401(k) average balance for savers in their early forties is about $87,000.

But either way, you’ve still got decades before retirement, and your savings should be on an upward trajectory. That means you should own plenty of stocks—-especially if you’re behind on saving and hoping for investment gains to help you make up some of that lost ground.

Nonetheless, it’s not quite so simple as when you were in your twenties and early thirties. Now that you’ve got a real nest egg, market gyrations can start to feel awfully scary. (If you have three times your salary saved, a 33% market decline is roughly equivalent to losing a year’s worth of pay.) There’s a real risk that when the market plunges, you’ll panic and decide to sell your investments at a low price. “When the market recovers, it recovers quickly,” Schmehil says. “You can miss out on a lot of appreciation.”

History suggests that’s often exactly what happens. In the five years from the 2008 financial crisis, investors yanked more than $500 billion from U.S. stock funds, according to the trade group Investment Company Institute, while pouring roughly $1 trillion into bond funds. In fact, the stock market hit bottom in March 2009, before embarking on what would ultimately become a nearly decade-long bull market.

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The solution: While you may still be decades from retirement, it’s time to start gradually dialing back your hefty stock exposure. Chances are you’ve felt pretty good about stocks these days. Over the past decade the Standard & Poor’s 500 has returned over 14% a year on average.

But, most planners warn, the potential gains from a more aggressive portfolio—with, say, 80% or more in stocks—no longer match the big costs. “When you’ve seen 10 years of almost uninterrupted gains, it’s easy to be complacent,” warns Houston financial planner Ashley Foster. “But when something happens—and it will—you could be exposed.”

Increasing your bond holdings just a little can make riding out downturns much less stressful. Most professional investors recommend gradually moving your portfolio along what is often called a “glide path,” from 80% to 90% stocks in your early forties to 50% to 60% in your late fifties.

If you invest in a target-date fund within your 401(k), this will happen auto-matically. If you plan to handle your portfolio yourself, Foster recommends sitting down at least once a year to do a “gut check” on your portfolio: “Ask yourself, How would I feel if the market went down 10% tomorrow?” Would you be okay?

If you want extra help, one option is to take a quiz that accounts for not just your age and net worth but your risk tolerance too. This is what typically happens if you hire a financial advisor or a robo-advisor. But there are plenty of online versions available for free.

Retirement Considerations

The models above provide a guide for you if you haven't retired yet. They aim to give high returns while minimizing risk. That may not suit you when you shift to retirement. Then, you will need to take regular withdrawals from your savings and investments.

At that phase of life, your goal changes from growing returns to securing steady income. A portfolio built to boost returns may not be as effective at generating consistent income due to its volatility.

If you are near retirement, check out other approaches. For example, you might add up the amount you need to withdraw over the next five to 10 years. Then, you might decide which portion of your holdings to put in bonds, with the rest held in stocks. With that strategy, your needs are safely invested but you allow some room for growth. However, the part invested in stocks is still subject to volatility, which you should watch carefully.

How to pick a savings account

The right savings account will be easy to use and free of monthly charges. Consider these pointers as you weigh your savings account options:

  • Is the interest rate competitive? Interest rates on savings accounts vary widely. Look for a high-yield savings account to help increase your money.
  • Can you automate deposits into the account from your checking account?
  • Check the fee schedule. Will you incur fees for normal account management activities?
  • Is it easy to withdraw or transfer money from the account? Are there free ATMs nearby? How long will it take to transfer money back to your checking account?
  • Are there extra features that make saving money easier? Some accounts have broader savings management capabilities. You might set up multiple savings goals, for example, and track your progress against each separately.

Why your risk tolerance matters as much as your age

If you were invested in the stock market earlier this year, you've already experienced a bear market, or when a major index falls by at least 20% from a recent high. You can expect a handful of these types of market declines over the course of your investing lifetime.

Not all investors react to market turbulence in the same way, which is why your tolerance for risk may be as important as, or even more important than, your age when determining how much money to allocate to stocks versus bonds.

It's possible your risk tolerance changed as a result of the recent market volatility, Edelman says. That's why he recommends thinking back to how you felt when the S&P 500 fell nearly 34% in about five weeks between February and March of this year. "If that induced fear and panic, you need to consider reducing your equity allocation," he says. "If you were to panic during a downturn and sell when prices are low, you would do a disservice to yourself."

VIDEO 3:20 03:20 How to plan for stock market downturnsGrow from Acorns

Video by Stephen Parkhurst

In theory, you should feel more comfortable taking on risk as an investor when you're young because stocks have time to rebound following declines. But risk tolerance may have more to do with your personality.

"The smartest thing to do from a psychological standpoint is to recognize your weakness so you can overcome them," Stovall says. "If you are a nervous Nellie, then you need to use a rules-based investment approach" that ensures you don't make an emotional decision you'll later regret, like selling when stock prices are low, he adds. 


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