How Much Should You Invest Based on Your Goals

Are you investing enough to achieve your major life goals, such as retirement?

There’s no one answer for how much to save or invest. Every person’s investing target is a function of their specific circumstances — how much they make, how much they spend, the lifestyle or experiences they want to have later in life, and how much they’re willing to sacrifice to attain it.

But, regardless of where you are in your journey toward financial independence, it’s generally a good idea to save at least 20 percent of your after-tax income each year.

If that number seems high, remember that saving and investing can take many forms. Of course, it can be traditional shares, managed funds, or ETFs, old-fashioned superannuation schemes, and of course KiwiSaver. It can also include real estate, such as repaying equity on a rental property.

By saving 20 percent or more of their income each year, people can do themselves two big favours:

1. They’re putting away a lot of money that can earn interest or investment returns. Eventually, the compounding effect means these earnings can out-strip their regular income from salaried employment or business.
2. They’re learning to live on only a portion of their income, making it easy to pay their bills later if they experience an interruption in earnings.

No matter what field you’re in, investing in more education to expand your skills can also be a worthwhile form of investment in your future earning capacity.

The 50/30/20 Rule

The 50/30/20 rule is common guidance for structuring a personal budget. It basically says that:

• 50 percent of a person’s regular income should be used to pay for their needs. Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent payments, food (groceries, not dining out!), insurance, basic transport, and utilities such as water and electricity. These are your "must-haves."
• 30 percent of their income on wants. Wants are all the things you spend money on that are not essential. This includes dinner and movies out, that new handbag, tickets to sporting events, holidays, the latest electronic gadget, and online streaming services. Anything in the "wants" bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out, or watch free to air TV instead of getting tickets to the game or paying for Netflix.
• The remaining 20% should be invested.

As far as the strength of the rule, 50/30/20 is a decent guideline, but mostly as a baseline for people first starting out. As a guideline, it can be harder for people to save when they're young. Many young adults are dealing with student loans, their first car, or other bills and debts before saving becomes realistic. If you're behind, that's okay. You can still catch up.

It's also worth acknowledging the 50/30/20 split assumes a cost of living where 50% covers necessities. For younger renters especially in Auckland, Wellington, or other high-cost centres, rent alone can consume 40% or more of after-tax income, making the 50% needs target unrealistic before food and transport are even counted. If you're in this position, don't write off the framework entirely. Instead, adjust the ratios to reflect your reality and focus on growing the investment portion over time as your income increases or if you can reduce your housing costs .

For those who are serious about achieving financial independence, 50/30/20 should be considered a starting point. From there, they should try to shift their spending away from wants, and then eventually from needs as well. This is done by lowering your cost of living or by reorienting your expenses. By buying a residence instead of renting, for instance, you can reclassify a portion of your housing costs each month from needs-based spending (rent) to investing (the principal portion of mortgage repayments).

Once you start earning more, perhaps through hard work, experience, promotion, or further education, you should probably be investing more than 20 percent of your income.

Another Guideline for NZ Investors

Here’s another thought: commit yourself to making total annual investments which are equal to your income taxes. The logic is that if you’re paying that much to the government, you should be “paying” that much to your future self too!

To determine this, simply figure out how much tax you pay each pay period, perhaps using an online calculator, then match whatever you pay in tax with investment contributions. For instance, a person earning $100,000 annually with three percent KiwiSaver contributions makes pay as you earn (PAYE) tax payments of $920 per fortnight, so should be making total investment contributions of $920 a fortnight.

KiwiSaver is likely doing some of this heavy lifting already. New Zealand employees can contribute at rates of 3%, 4%, 6%, 8%, or 10% of their gross pay, and employers must contribute at least 3% on top. For someone earning $100,000 on a 3% contribution, that's $6,000 per year going into KiwiSaver between you and your employer, or $231 per fortnight.

However, before increasing your KiwiSaver rate, consider whether additional savings would be better directed into an accessible investment portfolio instead. KiwiSaver funds are locked away until you reach 65 (or qualify for a first home withdrawal), which limits flexibility. A separately managed portfolio can deliver similar or better long-term returns while keeping your money accessible for opportunities or life changes along the way. The employer's 3% minimum contribution is essentially free money and worth capturing, but beyond that, investing additional savings outside KiwiSaver often makes more sense.

Work Backwards

Especially if you’ve turned your attention to retirement, there are plenty of free and paid retirement calculators available online that can help you figure out how much you need to be regularly investing to achieve your retirement income goal.

This is the “goal-based planning approach”, and helps you work backwards from what you really want in life, to ensure you’re investing enough to get it.

Basics First

But, before you start investing, it’s first a good idea to:

• Repay any bad debts such as car loans or credit card balances. That’s because these debts usually pack high interest rates, which drain your finances a lot more than you might first think.
• Build an emergency fund that you can tap into if you ever need cash in a hurry. Having an emergency fund can help you avoid accumulating large credit card balances or bad debts as a result of these unforeseen expenses. The size of your emergency fund really depends on your overall situation, such as income and lifestyle, the potential size of costs you might incur without warning, how quickly you can cut other expenses if the need arises. Still, a few months is usually a good rule of thumb.
• Ensure you’ve appropriately protected yourself against other risks. For instance, there’s no point investing a heap only to have to spend a lot of it on some health issue that stops you working and isn’t covered by ACC. Assessing and mitigating a multitude of risks might include establishing appropriate levels of income protection cover, health insurance, trauma cover, and maybe life insurance too.

The Bottom Line - How Much of Your Income Should Be Invested

There are no hard and fast rules here, it depends on you and your situation.

A word of warning: the average Kiwi probably doesn’t fully realise what can be done with concentrated and regular investing, which – if done early enough – could include retiring decades earlier than expected, or just living a free and independent lifestyle.

If you'd like to learn more and discuss your investments and overall financial situation with a trained professional, then get in touch.