Savings and investment

What will be the ideal amount I should save every month?

Each and every individual should invest a certain amount of money regularly to fulfill his goals. However most of the individuals do not realize the need for investing and those who do, are not sure of the amount which they should invest. And hence both end up not investing anywhere. It is very crucial for any person to get started with investments. Delaying it will only increase the burden on your shoulders in the future, as then you will have to contribute more towards the accomplishment of the same set of goals.

Many of the naive investors face this problem of how much? One should not invest just for the sake of investing. Investing the right amount is also equally important. For example, a 40 years old person with a higher risk appetite who wants to build a retirement corpus of say Rs 1 Cr will have to invest Rs.10,000 per month at an expected rate of return of 12% p.a. in order to achieve his retirement goal. But if he is not aware of the fact that how much amount he should invest then he might not be able to achieve his retirement corpus.

INVESTMENT IS FOLLOWED BY SAVINGS

If an individual is not able to save then how will he invest? One has to make a balance between discretionary and non-discretionary expenses. Discretionary expenses are those expenses which satisfy our wants, for example, going for dinner, movies, shopping, vacations etc. These expenses can be avoided/frequency of visits can be reduced if an individual is not able to save extra out of his income.

While non-discretionary expenses are indispensable as they satisfy our needs, for example, groceries, utility bills, school fees, etc. These expenses cannot be avoided but can be reduced if one pays careful attention to the expenses. For example, a person may opt for prepaid plans instead of postpaid plans as the former is more economical.

RULE 50/30/20

An individual can always follow this thumb rule in order to manage his income effectively. This rule states that a person should employ 50% of his monthly income towards the fulfillment of basic needs which are vital for running a household. The next 20% should be earmarked for saving purpose and the rest 30% can be utilized for one’s discretionary expenses. However, a person will be better off if he saves more.

So, now coming back to the main question, how much should one invest? Well, there is no straight forward answer to this question. It depends on the number of factors which vary from investor to investor. These factors are mentioned below:-

FINANCIAL GOALS TO BE ACHIEVED

We all have different sets of goals. Some may have the goal of buying a home while some may want to build a corpus for their children’s marriage or education. The corpus required in both situations will be different and hence the amount to be invested will be different.

TIME HORIZON

Have you ever wondered why is it necessary to invest early and how much difference can it create to your wealth in the long term? Well, investing is all about time. If you start investing at the beginning of your career then you will have to put in less money to achieve your future goals, while on the other hand, if you delayed investing by 10 years then the investment amount will raise manifold. The factor responsible for this is compound interest.

RISK APPETITE

Your risk appetite also influences the amount you need to set aside for the accomplishment of your goals. A person having a higher risk appetite can afford to invest in risky asset classes like equities on which higher returns can be earned which lessens the amount of investment required.

SAVINGS

An individual who has just started off with his career might not save too much out of his income but that should not stop him from investing. For example, you want Rs.1 crore after 20 years and for that you need to invest Rs 10000 p.m. at 12% p.a. return towards achieving a goal which is 20 years away from now, but you are able to save only Rs 5000 currently. So instead of deferring your investments, you should at least start investing this much amount.

If in case the investment is delayed by say only 5 years, then the per month investment requirement will shoot to Rs 19800 from Rs 10000. While on the other hand, if you would have been investing Rs 5000 p.m., then after 5 years you are required to put Rs 14900 for the attainment of your set goal.

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