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
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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”.
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
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.
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.
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:
(click to open in a new tab)
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.
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.
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:
(click to open in a new tab)
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:
(click to open in a new tab)
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.
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
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This post titled Where to invest your monthly income if you spend only 45% a month? first appeared on 02 Aug 2023 at https://arthgyaan.com
