Are you investing enough from your monthly salary?
What percentage of my monthly income should I invest? If this thought ever crossed your mind, you are not alone. It’s a common question that investors have, especially in the initial years of their investing journey.
Since there is no one answer that works for everybody, we are here to help you with tips on how to define an investment amount that helps you achieve your financial goals.
A cricket analogy to make things easy to understand!
In a 50 over ODI cricket match, the team to bat first does not have an exact target score to chase & cannot define the exact run rate at which they need to score to win the match.
However, they do estimate a certain minimum run rate required in their innings (say 5–6 runs per over) to win the match (higher the overall run rate, the higher is the chance of winning).
Likewise, when you are in your 20s or early 30s, you may not have a clear idea of your long-term financial goals as those goals tend to evolve over time based on your lifestyle, income, family’s aspirations and so on.
So what you can do in the absence of a clear target is, begin your investing journey & choose a certain acceptable investment rate — typically, investing 30–40% of your net income is considered a healthy investment.
Just like how a batsman may not score 5 or more runs in each over, you may not always be able to save 30–40% and that’s perfectly fine. The idea is to try and achieve that level of average investment over time. Also, if your current financial situation allows you to save more (say 50%), do so, because there may be situations in future where you may not be able to maintain that 30–40% investment rate.
Remember, investments made at a young age and held for a long term can add more value to your journey of getting rich, due to the power of compounding (
Now, let’s go back to our cricket example. But this time, let’s say the team is batting second in an ODI match. Since they are batting second, the batsmen would know the exact target that they need to chase and hence can pace their innings accordingly.
Similarly, as you move into mid 30s and beyond, you will have a better perspective of your short, medium, and long-term financial goals. This clarity on financial goals would make it easier to decide the amount that you need to invest to achieve those financial goals, considering your risk profile and expected rate of return. For example, you may have goals such as accumulating a certain amount to achieve financial security, planning for your child’s future, buying a car and so on (we will cover more about financial goal-based investing in a separate blog). Each of these goals would require you to make certain regular investments and all such investments put together would help you arrive at the overall investments you need to make.
In the end, it’s important to reiterate that you need to start investing. It does not matter whether it’s 20%, 30% or 50% of your income. Once you start, you can always adjust the amount you invest as you progress in your wealth creation journey.
Mutual Funds are subject to market risk. Please read all scheme-related documents carefully before investing.
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