Should You Invest 20-25% of Your Net Income or Gross Income?

May 30, 2023

In this highlight, we discuss if you should invest 20-25% of your net income or gross income.


Let’s move on to Mike’s question. He says, “If contributing to only Roth accounts, would my target be 20 to 25 percent of my net income instead of gross income? If it’s still the gross income, then why do you guys talk about percentages of gross over net?”

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Yeah, I think it’s always so funny, Brian, because people, like, they want to game—I say game, and that sounds negative, I don’t mean negative—but they want to find ways around it. They ask, “Why do you do gross? Why don’t you base it off of net? I don’t actually get to see my gross income. I see my net income in my checking account. Why don’t you guys base it off of that?”

So, again, I’ll speak vaguely here to start, and then Brian will drill down into the details. First, for most people, it’s much easier to know what their gross income is. If you ask them how much money they made last year or what their salary is, it’s really easy for them to give you a total number. They can say, “This is my salary, plus bonus. This is how much I make.” But then they have health insurance taken out, their 401k contribution, and taxes. Taxes change as their income changes. It’s just a more nebulous number to hit when you shoot for the net number. It’s really easy and removes friction when you focus on the gross number, making it easier to calculate what you need to be saving.

Practically, there’s also some math associated with why we like the 20-25 percent. It’s crystal clear. There’s no gamesmanship with your gross income number. I also like that it lets you focus on paying yourself first. Many people in our society say, “I’ll save what’s left over,” but when you focus on net income, there are so many filters that money passes through based on your employer’s cafeteria plan. There’s a lot of stuff coming out, and you’re not getting a good dashboard view. Remember, if you do what we tell you to do, you will be the CEO and CFO of a multiple seven-figure enterprise at some point. You need to work off the same metrics because it doesn’t do any good if you’re basing this number off of gross and that number off of net. I like to get the top-line number because then when you do the simple math of 20-25 percent, there’s no playing around with it. You’ll be on point, budget better, and figure out how to make the plan happen faster.

We’ll also challenge you because, in your 20s, that is a very aspirational goal. But you’ll get the next pay raise due to inflation and your great performance on the job. They might give you a 15 percent pay raise, and instead of saying, “That’s great, let’s take it down to the net,” you can say, “You know what, I want to take a good chunk of that, what takes me up to gross, and make sure it filters down to that percentage I’m saving and investing for the future.”

We have this thing that shows—if I’m correct, I’m putting you on the spot—I don’t think we made this a true free deliverable, but we came up with it in our “Know Your Number” course. It shows at each age, if I save this percentage of my income, then I will be able to replace the income. There it is! This sheet is a great idea. We base all those numbers off of gross, and it’s part of the “Know Your Number” course. But we wanted to give you a taste for free. So, you can go to moneyguy.com/resources to get that and find out how much you’re saving and how much money you can replace.



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