This article answers a question about investing a certain percentage (here 55%) of your monthly income.

📚 Table of Contents

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• Background of this article
• Step 1: Covering the pre-requisites
• Step 2: Set investment goals
• Step 3: Setting the retirement goal
  • Expense structuring
  • Model output for retirement
• Step 4: Setting a house purchase goal
• Step 5: Setting children’s education goals
• Step 6: Vacation and other goals
• Step 7: Setting FIRE goals
• Step 8: Putting it all together
• What should the investor do now

Background of this article

This article is a response to a question on social media:

45% of salary is enough for all expenses, best option for the investment for the remaining amount and what percentage to invest please suggest

There are three parts to this question:

• the monthly investible surplus is 55% (surplus = income - expenditure)
• most investors conflate “best option for the investment” as the “best” mutual fund, stock, FD, PPF, NPS etc.
• “what percentage to invest” is the interesting part since it shows that the investor is at least aware of the concept of asset allocation is not in looking at dumping all of their surplus into an equity mutual fund

We will cover the goal-based investing process step-by-step as per this framework: I am now ready to do goal-based investing. What now?.

Step 1: Covering the pre-requisites

Before you start investing, ensure that you have first completed the following steps:

• An emergency fund with 6-12 months of expenses
• A term insurance policy (unless you are retired with no income)
• A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
• A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• No high-interest debt like credit card or personal loans

Read more here: I have heard of goal-based investing. What now?.

Step 2: Set investment goals

Goal setting helps you understand the priorities of your life, set the future of you and your family, understand the various money-related challenges that come and be best prepared for the future financially. Goals give direction and momentum to your financial life:

• direction: if you know why you need it then you know what to invest for. Creating wealth is not a goal. But investing for the purpose of sending your child to Harvard in 15 years is a goal
• momentum: this allows you to build investing discipline and track progress along the compounding journey. Without a goal, it is likely that the money will be spent on frivolous things just because “money is available”.

You will hurt your chances of creating wealth via compounding if goals are not set.

Read more on goal setting here: Set a goal before looking for what to invest in.

Once goals are set, we will use the Arthgyaan goal-based investing calculator to build a portfolio that will invest the investible surplus. Assumptions for the model:

• current in-hand salary (including EPF) is ₹160,000/month which means that the investible surplus is 55% of it i.e. ₹88,000/month
• 7% inflation both before and after retirement
• 40 years in retirement starting 30 years from now
• 10% increase in yearly investment until retirement
• Risk profile is moderate (60:40 equity and debt allocation for goals > 15 years away: see this for details)
• 11% and 4% as long term returns (post-tax) of equity and debt respectively

Existing assets are:

• Equity assets: ₹22L
• Debt assets: ₹6L
• Cash assets: ₹2L
• Total asset value is ₹30 lakhs

We will start with the retirement goal first, since everyone compulsorily retires and you cannot take a loan for it, and then add the rest. In all the cases below, EPF contribution is included in the SIP amount for the debt side of the portfolio.

Step 3: Setting the retirement goal

Expense structuring

We will use this retirement expense estimation tool to calculate today’s expenses and determine how much to spend in retirement.

To know how much you can invest for goals (the investible surplus), you need to classify and figure out approximately the major monthly expense heads under the three main buckets below:

• mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
• variable/discretionary: entertainment, transport, clothes, anything discretionary
• save-to-spend: these are used for the sinking fund that is used to pay for hefty annual expenses like insurance premiums, festival gifts and travel by saving for them every month

Model output for retirement

The current monthly expenses are ₹72,000 (45% of ₹160,000). This leaves 55% (₹88,000 of ₹160,000) for investment goals. The model output for retirement is shown below:

We see that the investor should invest ₹34,000/month for retirement in a mix of equity and debt investments as per the model output. The retirement corpus to be reached in 30 years is ₹12.64cr. To safeguard their future, the investor should have enough term insurance of ₹3cr based on the current assets and the retirement goal target.

We are well within our ₹88,000 month investible surplus and can consider other goals like a house purchase.

Step 4: Setting a house purchase goal

Using the SMART home goal framework, we will plan for a:

• ₹1crore house purchase
• 5 years from today
• with ₹20 lakhs down payment and ₹80 lakhs loan

We will apply the home purchase affordability test and look at the updated model:

The model moves the majority of the portfolio into cash to save for the down-payment due in five years. The additional SIP amount to save for the EMI payments is ₹28,000 while the retirement SIP increases to ₹42,000. This rise is due to the fact that a large portion of the ₹30 lakhs assets is now tagged to the house purchase and not to retirement.

The total SIP amount is ₹70,000/month and the term insurance coverage amount is bumped to ₹3.75cr to cover the future home loan liability. We have ₹18,000 room left in the monthly investible surplus.

Step 5: Setting children’s education goals

We will now add a simple ₹25 lakh college education goal for a 4-year degree starting 4 years from now using the child goal framework. The model output is:

We see that the new SIP amount is an additional ₹20,000 which takes it just above the total investment surplus.

Step 6: Vacation and other goals

We can add other goals to this like car purchase and foreign vacation but that will require de-prioritising one of the goals by either pushing out the house purchase or lowering the child education goal by considering an educational loan.

Step 7: Setting FIRE goals

We will now consider an alternative scenario where the investor has not planned for children’s goals and instead has plans to retire 7 years early. Using the FIRE framework, we get the following model output:

We see that this goal can be funded by a total of ₹85,000/month.

Step 8: Putting it all together

We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Get the Sheet

Once you get your sheet, you can access video tutorials in the howto tab.

What should the investor do now

This is the original question:

45% of salary is enough for all expenses, best option for the investment for the remaining amount and what percentage to invest please suggest

We will now summarise the multiple cases above and then use the investment to goal-tagging framework to map goals and investments together:

• Case 1: Only retirement: SIP ₹34,000 of which ₹20,400 is invested in equity and ₹13,600 in debt
• Case 2: Retirement and house: SIP ₹70,000 of which ₹34,000 is invested in equity and ₹36,000 in debt
• Case 3: Retirement, house and college: SIP ₹90,000 of which ₹46,000 is invested in equity and ₹44,000 in debt
• Case 3 alternative: Retirement, house and FIRE: SIP ₹85,000 of which ₹43,000 is invested in equity and ₹42,000 in debt

In each of the above cases, the existing assets are rebalanced as per the appropriate asset allocation for that combination of goals

The key take-aways for the investor are:

• investment amount depends on goals (mix, horizon and value)
• monthly investment and portfolio need to follow proper asset allocation
• a tool like the Arthgyaan Goal-based investing calculator makes it effortless to plan and create the right portfolio for all goals together