Very often, I am being asked about – what part of income shall be invested. Some clients believe in expenses and savings, others believe in savings, expenses and buffer and their are also few- you say I never thought about investments. I earn, spend and rest is in my bank account. And let me confess – I love them all for their own kind of reasoning. Because as a financial advisor – I now know that we live in a country where Investments are not taught to kids and in most of the houses – it is not even advised.
And it is that reason that we decided to talk about it and set a limit to our income which must be invested on monthly basis.
There are two most fundamental questions when it comes to personal finance:
- “How much of income you should invest?” and
- “When is the best time to invest?”
In this article I’ll answer both the questions. The standard answer to the 1st question is, “As much as you can save”. Now different people interpret it differently. Someone in his 20s may be happy saving 10% and someone in his 30 may think that he can secure his future by saving 15-20% of his income and someone in his 40s and 50s may find 15-20% very less to secure his future and will try to save more. There’s no thumb/fixed rule when it comes to your personal finance and %age of income you should save and invest as a lot depends upon your personal financial plan, the age of your retirement and there could be a no. of other factors. Usually the general benchmark is 50/20/30 or 50/30/20 rule. Now the obvious question is what’s this 50/20/30 or 50/30/20 rule?
50/20/30 or 50/30/20 Rule:
50% of your Income- Fixed Costs
These are the fixed expenses you incur regardless of where you live and work. These include your house rent, insurance premium installment, loan installments, electricity bills, mobile phone expenses, transportation and other utility bills. These expenses are generally same and you can easily calculate the percentage of your monthly take home income and you need to ensure your fixed cost does not cross 50% of your monthly take home income.
20% of your income- Savings
You must save 20% of your monthly take home income for your financial security. Please note your savings towards your PF should not be figured in this as you need to save 20% of your monthly take home income and not your gross monthly income. You must build an emergency corpus equal to at least your six months gross income and should use it as an emergency fund only.
30% of your income- Variable Expenses
Don’t commit more than 30% of your monthly income for variable expenses. Variable expenses include your personal choices like eating out, petrol/diesel bills, mobile data bills, entertainment, shopping, groceries etc. You should keep a track of these bills as you will be able to figure out which are the expenses can be minimized or avoided eg if you are eating out on a regular basis it will surely hit your monthly budget and you can decide to prefer homemade food which is not only more nutritious than the outside food but also saves a lot of money.
I am sure now when you have understood the answer to the first question you must be waiting for the answer to 2nd question: A number of people think they have missed the train and they didn’t invest when the markets were low or when interest rates were high. But the right answer of this question is every time is the right time to invest and depending upon the time horizon and your risk appetite you may chose from the wide variety of the investment instruments and invest. Don’t miss the train now. This is the right time to invest. Don’t delay it further.
You can simply write to us or speak to our financial fitness expert or even schedule a call to understand your investment plan.