A frequently-asked question by beginner investors is “How Much Should I Invest?”
A better question would be, “What Are My Savings Goals?” Many people dream of becoming a millionaire and being able to retire early or achieve financial independence. True financial independence means that you never have to work again and instead live off your current savings, along with the growth, interest, or dividends.
How soon you achieve financial independence depends, as always, on how much goes into your bank account each month and how much goes out. Proper budgeting can ensure you have money left over from your paycheck each month, after expenses, to save and/or invest.
How much you should invest is also based on where you are on the career ladder or time horizon to retirement. If you are a single working adult in your 20s and 30s and thus able to take on more risk, you should set aside a higher percentage of your salary to invest.
As you start a family, and put your children through school, the percentage set aside monthly for savings and investments is likely to fall, considering your increasing expenses and lower risk profile the closer you get to retirement or financial independence.
Key Budgeting Rules
A common budgeting rule of thumb is the 50/20/30 Budget Rule (or 50-30-20), popularised by U.S. Senator Elizabeth Warren in 2005 when she was then a bankruptcy law professor at Harvard University.
Put simply, 50% of your salary (after tax deductions) each month goes to paying for your Needs: rent or mortgage payments, car loan payments, groceries, insurance, health care, minimum credit card payments, and utility bills.
Another 30% goes to your Wants: dining out, movies, gadgets, concerts/gigs, electronic gadgets or new clothes, as well as vacations and your various entertainment subscriptions (Netflix, Prime, Disney+).
The final 20% should be allocated to your Savings. This includes EPF or pension contributions (both yours and your employers), fixed deposits (FDs), stock market investments, and even additional debt repayments that will reduce your total amount owed over the long term.