How much should you invest each month?

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We wish there was a golden number to answer this question. However, the amount you should invest each month is subjective.

It depends on a number of factors, such as:

  • Your monthly income
  • Your fixed expenses
  • Your investment goals

Let's take up each of these factors and figure out how they impact the amount you invest monthly.

Your monthly income

Somebody who earns Rs. 50,000 a month surely won't invest as much as somebody who earns Rs. 1,00,000, isn't it? Your monthly income plays a defining role in how much you invest each month.

To make things simpler, experts recommend investing around 20% of your monthly income, at the very least. Remember this from the 50-30-20 rule we talked about in our mail last week? Consistently investing around 20% of your income can help you build that enormous corpus you're dreaming about.

Here's how that would work.

  • If you earn around Rs. 25,000 each month, you could invest a minimum of Rs. 5,000 each month.
  • And if you get a hike in a few months, taking your salary up to Rs. 30,000, you could start investing Rs 6,000 monthly.

Your fixed expenses

The 50-30-20 rule is one of the most basic techniques to figure out how much to invest. It's simple, easy to figure out, and works for everyone.

There's also another factor you need to consider to arrive at the ideal amount that you need to invest. And that is the set of fixed expenses you have each month. Here's a sample list of what this generally includes.

  • Your house rent
  • Your electricity costs
  • Other utility bills like water and gas
  • Loan repayments
  • Property taxes
  • Insurance costs
  • Other groceries and provisions

Now, let's say you earn Rs. 30,000 each month. 20% of this is Rs. 6,000.
And, after you've paid off your fixed expenses, you're left with Rs. 16,000.
That's way more than the 20% of your salary.

And you can easily afford to invest more, going up to around Rs. 10,000 each month.

So, if you can afford to invest more than what the 50-30-20 rule advocates, go for it!

Your investment goals

Goal-based investing is another tried and tested technique to figure out how much to invest. Essentially, you figure out what your goals are, and you create an investment plan that helps you meet those goals.

Here's an example to help make this clearer.
Say you wish to make a down payment of Rs. 5 lakh on a home 5 years from now. So, your target amount is Rs. 5 lakh. And the tenure is 5 years. This means that you need to save up enough each month to have the down payment ready in 5 years' time.

But, let's back up a bit. You need to account for inflation. Assuming a 4.27% rate of inflation, a cost of Rs. 5 lakh today would be around Rs. 6.1 lakh in 5 years. So, here's what we have.

Particulars

Value

Amount you need to save up

Rs. 5 lakh

Period over which you need to save up

5 years

Inflation rate

4.27%

Target amount after inflation

Rs. 6.1 lakh

Expected rate of return from your investment

8%


Now, if you're investing in an SIP monthly, you can simply make use of our Wealth Creation Calculator to see how much you need to invest each month.

We input the values in the above table and here's what we got: a monthly investment of Rs. 8,421.

In this manner, you can chart out a plan for just about any goal you may have. Long-term goals, short-term goals, big ones and small ones - this works for all of them.

ADV/4/22-23/57

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