We have received several queries from the investors’ community, asking about how much of the salary should be invested in best mutual funds or any other investment instruments for that matter.
In this blog, we seek to discuss how you may compute how much of the salary you should ideally invest in any form.
Where do people use their income?
Generally, people use the income for three purposes – expense, emergency, and savings for family and self-goals.
In general, if you can save 30% of income, then 85-90% of it should go towards investment. Of course, it’s even better if you can save more. If you have to know a broad level number, we, at Tarrakki Research, believe that the following break up of income works well for every individual –
- Expense – 70% of the income
- Emergency funds: 5% of the income
- Investments: 25% of the income
Talking of the Investment, the best mutual fund for investment currently is the Systematic Investment Plan (SIP). If you have to get a fixed value to the Systematic Investment Plan, it is difficult to arrive at a number that shall be applied to everyone. Thus, you need to arrive at a fixed amount by taking into consideration your fixed obligation.Let us see how –
The fixed obligation is the amount of money that is paid towards different expenses. This includes your rent, food cost, electricity, water charges, school fees, tuition fees, clothes, your Equated Monthly Installments (EMIs), and the likes.
Once you have the fixed obligation computed, you can divide the same to get the fixed commitment (obligation) to income ratio (FOIR). The rate helps you understand the cushion you have in your monthly income that can be used towards salary.Let us take an example –
Mr. A has a take-home salary of Rs 100000 per month. He is married with one child who is five years old. Mr. A owns a Tata Tiago that is financed for seven years with a monthly EMI of Rs 6500
Mr. A lives in a rented apartment and has the following expenses every month –
Rent = Rs. 15000
Electricity Bill = Rs. 2000
Food etc. = Rs. 15000
Tuition Fees = Rs 7000
Fuel Expenses = Rs 5000
Clothing = Rs 5000
EMI = Rs 6500
Total Expenses = 15000+2000+15000+7000+5000+5000+6500 = 55500
Total surplus = Rs 100000- 55500 = Rs 44500
Thus, Mr. A can make a SIP of Rs 44,500?
Not really. He should set aside some funds for an emergency, which can be 1/4th of the monthly expenses depending on the liquid surplus created. The remainder can be used for SIP for wealth creation.
Where to keep the emergency funds?
Well, emergency funds are the ones that help you tackle your expenses during emergency. Thus, these funds need high safety and high liquidity so that it can be utilized whenever required. For this you need to opt for either traditional instruments such as savings account, fixed deposits, etc. or you may consider current day instruments such as liquid funds, which provides similar safety and liquidity, but superior returns. Check out our Tarrakki – best app for mutual fund in India available on iOS and Android for more information on different liquid funds. Apply for Tarrakki Zyada account and park idle funds where you not only get additional returns but also an HDFC Bank debit card for easy withdrawal for free.
After a quarter of your monthly expenses is separated from the surplus towards the liquid fund, you are left with the money that will help you reach your goals.
Long-term goals or wealth creation
For long-term goals, you should opt for the Systematic Investment Plan (SIP), which shall help you achieve your goals due to the benefits it offers, such as compounding, averaging, and the likes. For starting SIP, do not invest the entire surplus (after subtracting the emergency fund portion) in one fund or towards one goal. Also, do not think that every fund will help you achieve every goal. Mutual funds don’t work on the principle of one size fits all. Thus you need to plan for financial goals separately. For example, saving for child education, buying a house, bigger car, vacation, expensive jewellery, and the likes. Click here to read our take on how MF can help you save for your child’s education via the SIP route without hurting your pocket.
Saving a proportion of salary every month is a good thing to do as it helps you secure your future not only from retirement angle but also makes you financially independent and debt-free if done well. Lastly, remember as your income increases, the value of SIP should increase in a similar proportion so that you can take the benefit of top-up. Also, this helps you save for other responsibilities you may have when you start a family.
If you feel that due to obligation towards EMI (for education, home loan, etc.), you are unable to save 30%, even a 10% savings should help you grow your wealth. What matters is that you should have a habit of setting aside some funds (sizeable when compared to income) for wealth creation.
Should you wish to know more, feel free to drop in a line to us at firstname.lastname@example.org, and we shall be glad to assist. You can always connect with us through our app and may stand a chance to have a one on one interaction for your portfolio health check – an exercise you should conduct every six months. All you need to do is download the Tarrakki app from iOS and Android and create a hassle-free, paperless account within seconds. We shall connect with you for your portfolio review once we have your details.