How Much of Your Income Should You Invest? - The Beginner’s Guide

Investing your money is an excellent way to grow your wealth over the long term.

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Whether you’re just starting your career or you’re a seasoned pro, it’s never too early or late to invest in your future. But how much of your income should you invest? 

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The answer to this question is not a one-size-fits-all solution and investments can look different for different people, depending on your income, age, priorities, and investment goals.

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Before we help you find the right answer to this question, let's first discuss why you should invest your wealth.

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Why should you invest your wealth?

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Regardless of your salary, investments play a crucial role in securing your financial future and building wealth. Here are a few reasons to invest instead of having your money sit idle in your savings account: 

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• Investments provide the opportunity to grow your money over time and generate additional income streams. 

• They allow you to leverage the power of compounding and take advantage of the potential returns offered by various asset classes. 

• Whether you have a modest income or a higher salary, investing helps you combat inflation, achieve your financial goals, and create a solid foundation for long-term financial success. 

• Investments form a pathway to financial independence, enabling you to create a more secure and prosperous future.

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Now that you know about the benefits of investing, let’s dive into the main question: How much of your income should you invest? 

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How much of your salary should you invest?

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Deciding the exact figure of how much of my paycheck should I invest depends on several factors such as income, savings goals, current financial obligations and future expenses.

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According to experts, a general rule of thumb is that you should aim to invest at least 10-15% of your income for retirement.

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But should you invest 10% of your income? The amount you invest varies based on demographics and tax brackets so this 10% may not work for everyone.  However, this may vary depending on your individual situation. Another popular investment strategy is the 50/30/20 rule. 

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50/30/20 Budgeting Strategy 

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The 50/30/20 budgeting strategy tells you how much to save and invest each month.

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It recommends dividing your after-tax income into three categories: needs, wants, and savings. Fifty per cent of your income should go towards needs such as rent or mortgage, food, and utilities. Thirty per cent can be put towards wants such as entertainment, dining out or other non-necessities. Finally, 20% of your income should go to savings such as investments in stocks, bonds and real estate. 

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While the 50/30/20 strategy is a helpful salary investment calculator, it may not work for everyone.

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Before you get started on deciding how much percentage of income should be invested, there are some considerations to keep in your mind. We’ve broken down your investment journey into 4 steps to help you get started: 

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Step 1: Considerations Before Beginning Investment Journey
 

Before embarking on your investment journey, there are several important considerations to keep in mind. Here are a few questions to ask yourself: 

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1) What is your current financial situation like? 

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Take a close look at your income, expenses, and outstanding debts.

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Understanding your financial landscape will help you determine how much percentage of your income should be invested without jeopardizing your day-to-day financial needs. 

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2) What is your risk tolerance?

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Determining your risk tolerance will guide your investment decisions.

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It helps you understand if you are comfortable with taking on higher risks in pursuit of potentially higher returns, or a more conservative approach to preserve your capital. 

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3) What is your investment time horizon?

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Your investment time horizon tells you how long you plan to invest your money before needing to access it.

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This will help determine the appropriate investment vehicles and strategies for your goals.

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4) What are your financial goals? 

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The final question to ask yourself before commencing your investment journey is to understand your short-term and long-term financial objectives.

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We will dive deeper into this question in step 2.

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By answering these questions, you can gain clarity on your risk appetite, investment timeline, and financial capacity. Your answers will help you create a tailored investment plan that aligns with your unique circumstances and aspirations.

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Step 2: Setting Your Investment Goals 

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Defining clear investment goals is crucial to guide your investment strategy and to figure out how much of your income should you invest.

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Start by identifying your short-term and long-term financial objectives. Short-term goals might include saving for a down payment on a house or funding a dream vacation, while long-term goals may involve retirement planning or building generational wealth.

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Your goals should be specific, measurable, achievable, relevant, and time-bound (SMART goals). Setting these goals will help you determine the appropriate investment amount and time horizon. 

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Step 3: Exploring Your Investment Options 

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Once you've established your goals, it's time to explore the different investment options available to you. The investment landscape offers a wide range of choices, including stocks, bonds, real estate, mutual funds and commodities like gold. Each option comes with its own risk and return profile. 

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Stocks are one of the best high-return investment options but come with greater volatility. 

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Bonds, on the other hand, are generally considered more stable but may provide lower returns making them one of the safest financial assets for money investment in India. 

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Mutual funds provide diversification across a range of securities, making them a suitable choice for investors looking for professional management, access to a variety of assets, and potential long-term growth.

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Physical assets like gold and real estate can serve as a hedge against inflation and market volatility. Gold investments help diversify investor portfolios and preserve purchasing power in times of economic uncertainty. 

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Before you begin, research each investment option, consult with financial professionals if needed, and choose investments that align with your goals and risk tolerance.

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Takeaway 

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Investing is a dynamic and personalized journey that requires regular monitoring and reevaluation.

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It is essential to stay informed about market trends, economic factors, and any legislative changes that may impact your investments. You can also seek professional advice to better answer questions like how much to invest in SIP per month and how to invest your salary wisely in India.

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By following our three-step investment process, you too can understand how much to save and invest each month and be better equipped to make informed decisions and pursue long-term financial success.

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