# What percentage of my salary should I invest each month?

What percentage of my salary should I invest each month -10%,20%? This is a common question in personal finance forums and now in Quora. There are several wrong questions that people ask when it comes to personal finance and this is one of them.

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There is something weirdly comforting about a thumb rule. The answer to this question often is, “as a thumb rule, one should save 10% each month”. Every equation has underlying assumptions buried deep within. A thumb rule has twice the number of such assumptions because it is often the simplification of a formula.

Most of us do not stop to think, ‘when does this thumb rule apply, or more importantly, ‘when does it not apply’.

But first, what is the reason behind this question: “how much should I invest?”. My bet is on guilt-free spending.

A young earner is often looking for some older jobless guy to cough out a nice looking percentage – 10%, 20%. Then, that ‘thumb rule’ can be applied and the rest can be spent guilt free.

Now, where does this 10% or 20% come from? In this day and age, the difference between applying a thumb rule and using a calculator (app, if you will) to get a more exact answer is about 5 minutes.

The 10%/20% is probably the result of a retirement calculator with the assumption of 2-3% inflation, social security, the average increase in income etc.

CNN Money has one such calculator applicable for US residents. Here is a screenshot with following fine print

• longevity up to age 92
• Social Security is factored in.
• All calculations are pre-tax
• calculated using an inflation rate of 2.3%
• return is 6%
• the inflation-indexed annuity rate is 6%
• current income grows at an annual rate of 3.8%
• assume you can live comfortably off of 85% of your pre-retirement income

Notice that the savings rate should be 23% for a real return of close to 4% (return =6%, inflation is 2.3%) with social security available and tax has not been factored in!!

It is folly to assume even for US conditions that investing 10% or 20% of income is sufficient. Our inflation is anywhere between 8-10% (assuming no lifestyle change expenses -good or bad).

Our portfolio returns (not just equity) will have to be at least 10-12% after tax to combat inflation.

Want an (unpleasant) Indian thumb rule? Invest as much as you spend each month for normal retirement when you unmarried with no dependents. At least, try to invest 50% of what you spend later on.

For early retirement in India, invest close to twice as much as you spend each month. Not impossible, but depends on your priorities (an understanding spouse and of course, luck*).

Read more: E-book: How to retire early in India

Retirement Planning: My Story So Far

Analysis: My Mutual Fund Investing Journey

Wait a minute. Did I not just say thumb rules ‘suck’? Use this simple calculator to find out what percentage of your expenses (not income) you should be investing for retirement. Will only take you about 5 minutes. Here is a screenshot with inputs that I would use.

The post-retirement rate of interest is 1% above the inflation rate. For normal retirement, this is borderline reasonable and therefore, borderline dangerous. Recognise that is for 30 years later!! Who knows what will happen then! Better to be reasonable, err on the side of caution to start with, use the retirement calculator once a year with updated inputs. As retirement approaches, the numbers will become more accurate.

There are too many assumptions involved and while we can be reasonable with our inputs, the only security is to invest more, as early as possible. Another reason to do so, is because as we age, unexpected expenses may increase. For example, we may need to take care of our parents.
Download the retirement calculator as a function of monthly expenses

Non-windows office users can upload this Google drive. This will also work as-is on Mac Numbers and Mac Excel.

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## 8 thoughts on “What percentage of my salary should I invest each month?”

1. B says:

10% will get us nowhere…
Targeting something means limiting the same..i.e. save 25% of your income. That means saving is LIMITED to 25%. It should be the other way round. Expenses should be targeted, balance saved. Correct question by a youngster would be “What percentage of my salary should I spend each month?”

1. freefincal says:

well said!

2. Kameswara Rao says:

In our childhood we did mathematics. Like one fifths each for house rent, household expenses, for clothings, children’s educational and the rest savings. That thumb rule more or less here also. 20% savings means that only, is it not?

1. freefincal says:

Yes it is.

3. Dear Pattu Sir!

All the available literature on savings rate & inflation after retirement are based upon assumptions where sequence of returns are not taken into account. Personally, I would prefer to have a liquid net worth of 40-50X my annual expenses before even thinking about early retirement despite having an indexed pension (Railway Employee). What is your view on that?

1. freefincal says:

Yes, I agree

4. Santosh says:

At the age of 30, my networth was zero despite working for 8 years. Since then for the last 6 years I have been investing and then spending. As of today I invest 78% of my take home and spend the rest. Its difficult to maintain this rate but I really love this challenge. Despite this I am able to take 4 decent vacations per year and also spend on weekends i.e. living a good life. All this requires a plan and disipline.
Thanks to blogs such as yours and others.

1. freefincal says:

happy to know that. Thanks.