Find Your Long-Term Saving Ratio

You’re established in your career path. Maybe you stash some money away each payday and let your retirement account do the rest. But if you’re free from credit card debt and have some disposable income left after paying the standard bills, your next step should be saving and growing your wealth.

But with the many options available in today’s multifaceted financial landscape, it’s difficult to know exactly what, where and how to save. It’s also challenging to know exactly what you’ll need your money for and when. You might consider buying a house, saving for a baby or starting a business—or maybe a combination of all three and then some.

You want to make sure you’re on solid financial footing. Nothing makes you feel more secure and successful than an airtight plan for your money. As for where to start, we stand behind the common 50-30-20 rule: Spend 50% on needs, 30% on wants and put 20% toward savings.

When it comes to where to put said savings, that’s where you want to find the ratio that works best for you. You should have a savings account, a separate retirement account and, with any luck, an investment account. Do you need to invest? Of course not. But it’s next to impossible to seriously grow your wealth without one.

How much money you need to put away, of course, depends entirely on your personal goals and lifestyles. That’s a personal decision but experts agree that you should have three to six months’ worth of basic expenses in a savings account that you can access whenever you want without getting penalized.

Save for the immediate future

The downside of a savings accounts is that the returns are low, and in the long run they’ll barely keep pace with, or will be outrun by, inflation. So you don’t want to park a lot of money there—just enough to cover you in hard times. Still, you want to choose wisely. A high-yield savings account comes with no risk (because your money isn’t invested in the stock market) but it still yields 16x more interest than the national average.

Plan for retirement

Next is making sure your retirement savings—be it a 401K or IRA—is set for ultimate success. Experts suggest you should consider saving 10% to 15% of your income for retirement. Sound daunting? Don’t worry: your employer match, if you have one, counts. If you save 5% of your income and your company matches another 5%, you’ve accomplished a 10% savings rate. Automating your contributions not only makes it simple to fund but less of a tax burden on you in the long run. Once you’re set up, you’ll want to allocate your funds—meaning divide your contributions over various asset classes—between stocks, bonds and cash.

Keep in mind that “long term goals, like retirement, require an aggressive allocation, meaning a minimum of 90% in stocks,” says Bridget Todd, head of trainer development at The Financial Gym, who explains that the stock market has historically doubled every seven to 10 years. To make the most of your long-term investments, you need to go heavy on the stocks, she says.

Invest the rest

Speaking of stocks, it’s time to invest the money you have left after paying your bills and stashing aways some savings (and maybe even some of the leftover 30% from your “wants” category). The investing world has two major camps when it comes to the ways to invest money: active investing and passive investing. Both have merit, as long as you focus on the long term and aren’t just looking for short-term gains.

“Active investing,” according to The Motley Fool, means taking time to research investments yourself and constructing and maintaining your portfolio on your own. You’ll need to buy and sell individual stocks through an online broker. “Passive investing,” on the other hand, is the equivalent of putting an airplane on autopilot versus flying it manually. You’ll still get good results over the long run, and the effort required is far less. This typically involves putting your money to work in investment vehicles where someone else is doing the hard work—mutual fund investing is an example of this strategy.

A great solution for beginners is using a robo-advisor to formulate an investment plan that meets your risk tolerance and financial goals. Automate it as you did with your retirement account, and pay attention to rebalancing every six months. That’s likely the best way to maximize your return potential while keeping your risk level appropriate for your needs. With all these financial gears churning for you, your financial future is lock solid.