Off late, we have received many queries from our investors regarding the ideal amount which a-salaried individual should typically invest every month. In this blog, we seek to cover what an ideal portion of salary an investor should invest every month.
A 25-year old may have mixed feelings about his/her financials. At this age, when an individual typically starts earning, he/she feels like spending on anything and everything and at the same time, they also want a financially secure future.
While this thought process might be natural, it is important that an individual starts saving right from the beginning. Often investors feel confused about how to manage all corners of their finances so that everything remains balanced.
Budgeting has negative connotations, but, it can do wonders for your overall financial picture and it takes very little effort to create and maintain a budget. Think of a budget as simply a tool for organizing cash flow.
Thus, the first challenge is to strike the right balance from the investment and expenditure angle. This is not rocket science, it is just a simple logic.
You are, in essence, a CEO on a small scale who is taking steps to ensure your company’s (or family’s) cash. We believe your monthly income should be divided into three sections, namely: Expenditure, emergency fund, and investment.
In this article
Understanding the Ideal Composition of Salary
1. What is Expenditure?
As the name suggests, this portion of the salary deals with expenses such as house-rent, conveyance charges, shopping and other miscellaneous expenses. Being one of the most critical components of your salary, investors often tend to equate this amount with salary. However, this approach is wrong.
An individual must try and keep a check on this amount and fix it. This helps in better planning and budgeting.
2. Emergency Fund
An emergency fund is nothing but a liquid fund that is readily available, should there be any exigencies. It is advisable that an individual saves 3-months of his/her salary in an emergency fund, which is parked in a high safety instrument, such as a fixed deposit or a liquid fund.
One of the benefits of having an emergency fund is that you don’t have to opt for a high-cost personal loan in case of an emergency. An important requirement is that an individual must have the financial discipline to not touch these funds until they actually face an emergency.
This is the most important component. In this component, you invest a fixed share of your salary in different assets to create a diversified portfolio.
An individual should take this sincerely right from his/her early earning days. The sooner you start investing, the more the compounding effect increases.
Also, saving in merely fixed deposits, recurring deposits or other traditional instruments such as public provident fund (which comes with a lock-in of 15 years) would not help.
An investor should look to diversify across asset classes and must add new instruments such as equities, mutual funds to his/her portfolio.
This diversification enables an individual to accumulate wealth while efficiently managing tax and balancing their finances.
4. What Must Be a Balanced Portfolio
Should you wish to strike off a perfect balance in your financials, there must be a proper discipline in your approach by which you seek to contribute to these components. You must also decide how much to invest and keep aside for the emergency fund.
We believe the following would be an ideal allocation of your monthly salary:
5. Where Should You Invest 30% Of Your Salary?
Another question an investor has is where must the 30% salary go?
There are a large number of investment options available in the market. It depends on an investor’s requirement (defined by goal amount), duration of the investment and mainly, the risk appetite.
Having an adequate diversification in a portfolio helps in risk diversification. Following are the ideal investment instruments one should look at to invest:
You should look at your investment plan from a holistic point of view. Thus, apart from wealth accumulation, your investments should also help you get tax benefits. Various investment assets like mutual funds, SIPs, insurance etc. could be very helpful in tax management.
So, think wisely, look for your requirements and start investing for a brighter future.
Should you have any query with respect to any fund, check out Groww’s fund explorer, which gives you a comprehensive picture of the fund’s pros and cons, thereby helping to you make informed decisions.
Good budgeting may seem like a daunting task but it can be very helpful if approached with an open mind and with future plans in place.
Following a sound budget helps you achieve your goals that eventually reduce your overall stress level that may arise because of not knowing how much money is needed from time to time.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.