How much of your income should you invest?

Deciding how much of your income you should invest can be tricky. You have to estimate your target retirement figure, reconcile your monthly expenses with it, provide for emergencies, and so on. Here are some tips that can simplify the process for you.

Estimate your disposable income

The first order of business is to calculate how much money you are left with after meeting your monthly expenses. The remaining amount is your monthly disposable income. It is the maximum amount that you can invest in a month, without disturbing your routine. While calculating disposable income, keep aside a reasonable amount for recreation. You work hard for your money. You should have some fun too. But do not be too generous.

Provide for emergencies

The next step is to set aside funds for emergencies, like sudden death and job loss. Invest in a good life insurance policy and a good health insurance policy. Do you have unpaid loans? Buy a life policy with a big cover. This will leave enough money for your family after the loans are repaid. Create a contingency fund as well. A contingency fund is an emergency fund that you can dip into if you lose your job or face an unexpected expense. The contingency fund should be at least three or four months' salary. You can invest whatever remains of your disposable income after providing for emergencies.

Define your investment goal

An investment goal can be anything-retirement, your child's wedding, or an overseas trip. It is important to define the goal because your targeted sum and required return depend on it. Broadly speaking, you should invest between 15 to 20 per cent of your salary each month. But if your target figure is too high, you may need to invest more. In that case, you will have to rethink your monthly budget and put more aside for investing. You can also have several investment goals. But then you will have to maintain separate investment portfolios for each of them.

Include the inflation factor

In future, things will cost much more than they do today. So, it is important to consider inflation when calculating your target figure. Some estimates inflate current costs by 15 to 20 times when estimating values that are more than 20 years away. For example, if you plan to buy something that costs Rs. 10 lakh today, you could work with a rough estimate of Rs. 15-20 lakh in 20 years.

Portfolio allocation

You can invest in two types of assets-equity (shares) and debt. Equity offers higher returns than debt but carries a higher risk of loss. Debt mostly consists of government and corporate bonds. It offers lower returns than equity but involves a lower risk of loss. Your portfolio allocation will depend on the proximity of your investment goal. You can have an equity-heavy portfolio to begin with and a debt-heavy portfolio later on. In this way, you can quickly expand your corpus and have enough time to make up for any early losses. If you are in your mid-20s and are investing for retirement, you can place about 80 per cent of your portfolio in equity. As your goal (retirement) nears, move from a portfolio with more equity to one with more debt.

About Money99

Parag Patil is a technical analyst and trading system designer with stock excel programmer. I hope the articles and live chart of nse future and mcx on this Website will be as helpful and profitable to you . I try to update and post new articles tips everyday. My motto is to encourage the traders, so that they should able to understand the technique views behind the moment of stocks. I have deeply analyzed with many technical indicator with parameter and added to my amibroker afl. And even taken backtest report which is never being implemented. Any of the analyst expect me. Seeing all this you may understand that my views is more technical than commercial. If you are profited by my views I fill happy.