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Investment – How Much Of My Earnings Should Go Into It?

Investment - How Much Of My Earnings Should Go Into It?

Last Updated on by Tree of Wealth

How Much Of My Salary Should I Invest Monthly?

As you step into your new job, it’s crucial to consider how much of your hard-earned money you should put aside. For newcomers to the realm of investment, figuring out the optimal amount to invest might seem daunting. You might even question whether you possess sufficient funds to begin with. However, let’s debunk a myth here: you don’t need to amass a small fortune before you can venture into investments.

The investment landscape varies vastly across demographics and tax groups. So, identifying the right amount to invest begins with a thorough understanding of your exclusive financial circumstances and subsequently devising an investment approach that aligns with your budget.

When it comes to channeling a part of your earnings into investments, striking the right equilibrium is key. There’s no one-size-fits-all answer, but a widely accepted practice is to earmark approximately 10% to 20% of your income towards investment activities.

By consistently saving and investing within this range, you’re on your way to accumulating wealth gradually. Of course, if you harbor specific financial aspirations such as early retirement or preparing for a major expenditure, you might contemplate reserving a larger slice of your earnings.

Remember, each individual’s financial scenario is unique, hence it’s imperative to consider your present expenditures, potential debts, and the indispensability of an emergency reserve. These variables will impact the sum you can effortlessly set aside for investment purposes.

If the task of determining your investment sum seems overwhelming, don’t hesitate to reach out to a financial planner or advisor. Their expertise can evaluate your personal financial status, assist you in formulating your financial objectives, and design an investment strategy tailored to your income and goals.

Remember, investing is a marathon, not a sprint. The key lies in exhibiting patience and making well-informed decisions. By allocating a suitable proportion of your income for investments, you’ll be steadily progressing towards attaining your financial goals.

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The golden rule isn’t etched in stone

While the typical guideline suggests investing 10-20% of your salary, it fundamentally hinges on your pace towards financial independence. To accelerate your journey, you may want to boost this by an extra 5-15% to reach your targets in less time.

Wondering how much to invest? As a baseline, consider investing a fixed percentage of your income post-taxation. However, this percentage is flexible and will fluctuate based on your earnings, savings, and liabilities. Ideally, your investment should be around 15%-25% of your after-tax income. Starting small and gradually working your way up towards this goal is perfectly acceptable. The crucial aspect is to get started.

Certain budgeting techniques incorporate this concept, such as the 50/30/20 budgeting strategy. This method divides your monthly budget into three sectors: necessities (50%), desires (30%), and the remaining 20% for debt repayments, savings, and investments. For some individuals, investing 10% of their monthly income may be unattainable, but this should not dissuade you from investing altogether.

Before diving into investments – assess your financial landscape In certain scenarios, investing even a modest sum like $10 may strain your budget, especially if your financial affairs are not well-ordered. Before deciding on how much to set aside, contemplate the following vital factors:

Your earnings

Closely examine your monthly earnings and calculate your disposable income after covering essential expenses. If you’re living paycheck to paycheck, you might want to focus on building an emergency fund or making extra debt payments.

Your debt obligations

Debt, particularly high-interest ones, can turn into a quagmire if not managed properly. Take a hard look at your outstanding balances and their associated interest rates. Assess how much you can feasibly afford to invest, while still meeting at least the minimum payments on your debts. As you chip away at your debt, reassess your monthly investment amount and adjust it accordingly.

Your emergency savings

An emergency fund is pivotal in circumventing additional debt when unforeseen expenses arise. If you’re in the process of accumulating three to six months’ worth of basic expenses, you might want to consider investing a smaller portion of your income as you strive to reach this target.

Determine Your Investment Objectives

At 30, your plate is likely full of objectives: purchasing a house, starting a family, financing your children’s college education, and retiring comfortably and on your terms.

True, managing all these expectations on a $50,000 salary may seem daunting. However, remember that your income is likely to grow over time. Therefore, don’t allow your current or starting income to curb your aspirations. But it’s essential to prioritize. While establishing your investment plan, target each objective independently.

After making some assumptions and using a retirement calculator, let’s say you need to accumulate $1 million in capital – that becomes your target. Based on a savings calculator, and assuming an average annual return of 6.5%, you need to set aside $500 per month starting at age 30. That becomes your savings goal. Your next action should be to formulate a spending plan that lets you achieve this objective.

Having clear investment objectives can help you ascertain if you’re investing the right amount, at the right time, and in the right asset mix. It provides a timeline, gives you a starting point on how much to invest, and shows the impact it’ll have on your monthly or yearly budget.

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Consider The Following

The purpose of your investment: Are you investing for retirement, or do you aim to buy a house or fund your child’s education? Knowing your end goal will help you set a realistic timeline and simplify the decision of how aggressive your investment strategy should be to realize those goals.

Your Timeline

Your timeline will differ based on your objectives. If retirement is your end goal, depending on when you start, you might have decades to accumulate and enhance your retirement fund. You can begin small and gradually ramp up your contributions over time as your income increases. This timeline may differ for shorter-term goals like buying a house or retiring early.

Your Risk Tolerance

All forms of investing carry some level of risk, regardless of the assets involved. It’s important to gauge your comfort level with risk-taking. Novice investors should carefully consider the investment mix in their portfolio, as it’s prudent to have a diverse array. High risk-high reward investments like cryptocurrencies or growth-oriented stocks offer more volatility for investors. However, for those preferring lower risk, traditionally safer investments include treasury bonds, money market funds, and “blue-chip” stocks that offer dividends to investors.

How much of your salary you invest ultimately depends on your financial goals

Many individuals, especially in Singapore, are curious about the appropriate portion of their salary to allocate towards investments. There’s a variety of methods to determine this, but the crux of the matter boils down to your specific financial aspirations. For instance, if your retirement vision includes owning multiple properties and a luxury yacht, your investment strategy will need to be far more aggressive than someone who plans to retire in a rental apartment.

Let’s explore some strategies to figure this out:

A popular method recommended by some financial experts is the 50/30/20 rule.

This rule suggests that 50% of your monthly budget should be directed towards essential expenses like housing, food, and transportation; 30% towards lifestyle preferences; and the remaining 20% towards savings or investments. If you find that you can save more, gradually ramp up your savings until you reach a comfortable level.

The distinction between what’s essential and what’s a lifestyle choice can sometimes blur, right? Take food, for example – is it an essential or a lifestyle choice?

Here’s a simple litmus test: Consider whether your expenses are driven by social activities. If your expenditure on food, drinks, and transportation is a result of an evening of socializing, it’s more likely to fall under the lifestyle choice category than a necessity.

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Monitor your expenses

There are numerous mobile apps designed to help you keep track of your finances. Opt for the one that you find most user-friendly. Regularly updating your financial records can provide a clear picture of where your money is going, highlight areas for potential cutbacks, and ensure your savings are on the right trajectory.

Devise a Personal Budget Plan

A common error people make while formulating a personal budget is to shape their savings around their monthly expenditures, which essentially means they only save whatever remains after all expenses are covered. This approach typically leads to inconsistent investment habits, and in certain months where expenses surge, there might be nothing left for investments. Individuals committed to achieving their goals tend to invert this process and shape their monthly expenses around their savings objectives. If your savings target is $500, this becomes your primary expense.

Establishing an automatic deduction from your paycheck towards a retirement plan can make this easier. This compels you to manage your monthly expenses with $500 less at your disposal.

Invest Based on Your Risk Appetite

This investment plan presupposes an average annual return of 6.5%, a figure that’s attainable considering the historical performance of the stock market over the past century. The strategy assumes a moderate investment profile, with a focus on large-cap stocks.

If you’re risk-averse or prefer to include less volatile assets in your investment portfolio, you’ll need to adjust your expected rate of return downwards, which in turn necessitates an increase in the annual amount you invest.

When you’re in your 20s, 30s, and 40s, your longer investment horizon may allow you to assume a slightly higher risk for the potential of increased returns. As you inch closer to your retirement target, you might want to reduce your portfolio’s volatility by incorporating more fixed-income investments. By maintaining your focus on your benchmark of a 6.5% average annual rate of return, you should be able to design a portfolio allocation that aligns with your changing risk tolerance over time and enables you to keep a steady monthly investment contribution.

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Utilize a Reverse Calculation from Your Desired Amount

This is the most prevalent approach, and many financial advisors or wealth managers can assist you with this. To determine how much you need to invest, you first figure out how much you aim to save, then you work backwards from that amount.

For instance, suppose you want a retirement income of S$2,000 per month, which should last from age 65 to 80. This translates to approximately $24,000 per year, or about $360,000 in total. However, this is an oversimplification: the actual amount you’ll need will be significantly higher due to the effects of inflation.

Assume that you’re currently 25 years old, and the inflation rate will hover around three percent over the next 40 years (most developed countries have an inflation rate of around two to three percent).

Over 40 years, the purchasing power of S$360,000 will diminish. In fact, by the time you reach 65, it will only be equivalent to around S$110,360 in today’s terms*. That’s not your goal; you want your retirement income to have the same purchasing power as S$2,000 per month today.

So, you need to aim much higher. To retain the same purchasing power as S$360,000 in 40 years, you would need approximately S$1.174 million in today’s terms**.

Now, let’s determine the amount you need to contribute to your investments: Assume you assemble a diversified, balanced portfolio that yields an annual return of five per cent.

If you can commit to investing $10,000 annually (approximately S$830 a month), you could possibly attain your goal within approximately 39.5 years. The general principle here is to figure out your required amount for post-retirement, taking into account inflation. After determining the necessary retirement sum and understanding the returns your investment portfolio yields, you can make an informed decision on the amount you need to allocate for investment.

*retirement amount / (1 + inflation rate) ^ number of years

**retirement amount x (1 + inflation rate) ^ number of years

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Save After Establishing an Emergency Fund

This method, albeit not exact, is straightforward and easy to follow. With this approach, you start by setting aside 20% of your monthly income to build an emergency fund, which should be equal to about six months of your income. The emergency fund is your financial safety net for unexpected situations. As your income grows or if you need to draw from the fund, you’ll need to replenish it to maintain the six-month threshold. When your fund is fully stocked with six months’ worth of income, the usual 20% you’d set aside is then directed towards investments. This could be into mutual funds, blue-chip stocks, index funds, and so forth. You’ll still need to make wise asset choices and secure a good rate of return (consult a finance professional for advice). However, you can rest assured that financial emergencies will not disrupt your investment plan – if something unforeseen happens, such as job loss, you can utilize your emergency fund instead of withdrawing money from your retirement investments.

Adhere to Fixed Ratios

This is a conventional approach where you allocate fixed percentages of your income towards savings and investments. Typically, this equates to saving 20% of your pay and investing 15%. Many financial advisors suggest saving 10% to 15% of your annual income. A savings target of $500 a month equates to 12% of your income, which is deemed a suitable percentage for your income level. Assuming your income increases by an average of 4% per year, this automatically boosts your savings amount by the same percentage. In 10 years, your annual savings, which started at $6,000, will have risen to $8,540. By the time you reach 55, your annual savings will have grown to $16,000.

This method requires minimal planning or thought. If you automate the process through banking facilities like GIRO, the act of setting aside money won’t feel as taxing. However, this simplicity has its drawbacks. For instance, you may not realize that you’re saving too little for retirement, as there isn’t a concrete savings target. Also, you might end up saving more than necessary for an emergency fund. Remember that cash savings, such as keeping money in your bank account, can lead to financial stagnation. The money’s value decreases as it’s not growing, and it won’t keep pace with inflation. If you save excessively, you might actually end up at a loss.

Conduct Regular Reviews

Understand that your investment approach is likely to evolve over time. Regular self-assessment and budget reviews are critical to ensure your monthly investment remains appropriate. For example, a hike in income may motivate you to invest more, while a financial setback might necessitate pausing your investment contributions temporarily. Re-evaluating your investments monthly is particularly crucial in the current volatile macroeconomic environment. Regular checks help track the performance of your investments, and based on that, you might need to adjust your investment strategy.

Understanding Key Financial Concepts

A financial portfolio is essentially a collection of various financial investments such as stocks, bonds, cash, cash equivalents, commodities, closed-end funds, and exchange-traded funds (ETFs). While stocks, bonds, and cash are often considered the backbone of a portfolio, it’s not a strict rule. A portfolio can contain a diverse range of assets, including real estate, art, and private investments. These portfolios can be managed personally or by a finance professional like a money manager or financial advisor.

A personal spending plan, similar to a budget, is an informal tool that helps determine an individual’s or a household’s cash flow. It provides an overview of income sources and expenditure, aiding in tracking spending and determining suitable saving strategies when used alongside a financial goals worksheet.

The term “investment strategy” refers to a set of guidelines aimed at helping investors reach their financial and investment objectives. It directs investors’ decisions based on their goals, risk tolerance, and future capital needs. These strategies can range from conservative (emphasizing wealth protection) to highly aggressive (pursuing rapid growth through capital appreciation). Investors can formulate their portfolios based on these strategies, either independently or through a finance professional. These strategies are dynamic and require periodic review as circumstances change.

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If the idea of investing 15% of your income seems daunting, starting with a fixed dollar amount and maintaining consistency can also yield returns with the right investment strategy.

Having a clear plan is often the key to achieving goals, especially financial ones like retiring at a certain age with adequate savings. For instance, it’s possible to retire at 65 with $1 million in retirement savings if you start early, say at age 30, and remain committed to saving throughout your career. This goal can be achieved through four key steps: setting goals, creating a spending plan, committing to saving a percentage of your income, and investing according to your risk profile.

Strategic financial planning is the bedrock of achieving your long-term financial goals, be it a comfortable retirement, buying a home, or simply growing your wealth. It requires setting clear objectives, diligently managing your spending, committing to consistent savings, and tactically investing based on your risk tolerance. While this might seem overwhelming, remember that you’re not alone.

Our financial advisors are here to guide you every step of the way, providing personalized advice tailored to your unique needs and goals. Take the first step towards securing your financial future today. Contact our team of skilled financial advisors to start your financial planning journey.

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