Where to invest your monthly income if you spend only 45% a month?
This article answers a question about investing a certain percentage (here 55%) of your monthly income.
This article answers a question about investing a certain percentage (here 55%) of your monthly income.
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:
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?.
Before you start investing, ensure that you have first completed the following steps:
Read more here: I have heard of goal-based investing. What now?.
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:
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:
Existing assets are:
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.
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:
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.
Using the SMART home goal framework, we will plan for a:
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.
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.
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.
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.
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.
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:
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:
This article discusses how to plan early retirement in the face of lifestyle inflation and lack of health insurance for an investor in their 40s.
Published: 8 December 2024
7 MIN READ
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
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