What percentage of my salary should I invest each month?

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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.

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 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 the result of a retirement calculator with assumption of 2-3% inflation, social security, average increase in income etc. CNN Money has one such calculator applicable for US residents. Even with

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%
  • 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
Source: CNN Money

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*). I have managed to do this for the last 8 years or so and am within striking distance of financial independence:

Retirement Planning: My Story So Far

Analysis: My Mutual Fund Investing Journey

* Blessed with an understanding spouse, but not with luck when it comes to unexpected recurring expenses

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 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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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. “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.”

    Which Calculator? I think the Calculator is missing! !

  2. Gentlemen!!! I am not financial expert but I must understand how much money I will need for next 20 years for my expenses whatever it is .It can be education , home, food, health, travel car ,luxury etc. Calculate cost now multiply by 20 then multiply by 10 will be the approximate cost in next 20 years. Total cost divide by 20 will give you annual savings care about tax provisions. So why not save now preferably in ppf , elss and mutual funds. Rest will be ok. Ultimately you leave everything to your loved ones.

    1. “Ultimately you leave everything to your loved ones”. Assuming there is something left!

      “Rest will be ok.” Good luck.

  3. Superb article Pattu bhai…. Just loved it.. One request to you is write something on frugal living too ….Mixing it with some financial article would be great too.

  4. can the answer be as simple as “as much as you can” ?

    i am surprised a professor is saying people are asking wrong questions

    i am even more surprised people are confidently declaring what others are assuming and thinking when they are asking those wrong questions..

    i dont know if we feel asking about % in the question is wrong then giving big calculation as to what % is again wrong
    if there are 100 assumptions in the question then are 100+n assumptions in the answer too!

    1. Well, I can live with your surprise. Money management is riddled with wrong questions and of course, wrong answers, one of which is “as much as you can”. Because unless we understand the impact of inflation, we tend to put our wants on par with needs and decide ‘how much we can save’.
      I know many who have not invested enough, years after earning money, simply because they never used a retirement calculator.

      My blog, my opinions. You are free to disagree with them, and/or be surprised about them, or declare them to be wrong. The above is all the justification that I will provide.

  5. People are lazy to think, and so, they rely on fast thinking such as intuition, thumb rule. As a result, many of their decisions are not rational. If only people slowed down and think slow, they should understand thumb rules cannot be applied in all situations.

    Not my original insight but from the book “Thinking Fast, and Slow” by Daniel Kahneman, one of the founder of Behavioral Finance. You’ll love the book, Pattu sir, if you haven’t read it already.

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