The amount of income you should invest each month depends on your financial goals, current expenses, debt, and income level. However, a common guideline is the 50/30/20 Rule or a more customised approach based on your circumstances.
General Guideline: 20% of Income
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- 20% of your monthly income should ideally go toward financial goals, including savings and investments.
- This percentage may vary depending on your age, financial commitments, and goals.
Customised Approach
Here’s how to decide how much to invest based on your situation:
1. Cover Basic Expenses First
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- Ensure you allocate enough for essential expenses like rent, utilities, groceries, and transportation.
- Avoid investing money you might need in the short term.
2. Build an Emergency Fund
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- Before heavily investing, save 3–6 months’ worth of essential expenses in a liquid and safe place (e.g., savings account or short-term fixed deposit).
- This ensures financial security in case of unexpected expenses.
3. Pay Off High-Interest Debt
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- Prioritise paying off credit cards or loans with high interest rates (e.g., above 10–12%) before investing.
- Investing while carrying high-interest debt can often result in net losses.
4. Set Clear Financial Goals
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- Short-Term Goals (1–3 years): Save for emergencies, vacations, or a down payment.
- Invest in low-risk options like recurring deposits, debt mutual funds, or fixed deposits.
- Long-Term Goals (5+ years): Save for retirement, education, or wealth creation.
- Invest in equity mutual funds, stocks, or index funds for higher returns.
5. Age-Based Recommendations
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- 20s: Invest aggressively (20–30% of income) as you have time to ride out market fluctuations.
- 30s: Allocate 15–20% to investments while balancing family and other financial commitments.
- 40s: Focus on retirement planning, aiming to invest 20–25% of income.
- 50s+: Gradually reduce risk by shifting investments to bonds or safer options, while maintaining 15–20%.
6. Automate Investments
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- Use Systematic Investment Plans (SIPs) to consistently invest a fixed percentage of income in mutual funds.
- Start small and increase your investment amount as your income grows.
Example for ₹50,000 Monthly Income
Category Allocation
Essential Expenses ₹25,000 (50%)
Lifestyle Spending ₹10,000 (20%)
Investments/Savings ₹10,000 (20%)
Debt Repayment ₹5,000 (10%)
If you have no high-interest debt, invest the ₹5,000 in addition to the ₹10,000 allocated for savings.
Tips to Increase Investment Percentage
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- Cut Unnecessary Expenses: Redirect funds from non-essential spending to investments.
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- Increase Investment as Income Grows: Gradually increase the percentage of income allocated to investments.
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- Bonus/Extra Income: Invest windfalls like bonuses, tax refunds, or side income.