How Much Of Your Income Should You Invest?

You don’t have to be rich to invest.

Quite the reverse, in fact. Investing is the easiest way to build long-term wealth (besides inheriting it!). It can help you reach your financial goals and build a healthy retirement fund. It also helps you overcome inflation, which is the rise in the prices of goods and services, which causes your money to decrease in value over time.

If you are a new investor, one of the first things you will need to determine is how much to set aside to invest. Here’s how to get started.

But first, make sure you have an emergency fund

Before you start investing, make sure you have an emergency fund. Typically, this covers about six months of savings – more if you’re self-employed. Keep it somewhere you can access it quickly, such as a savings account. Here’s why you need an emergency fund:

  • Covers unforeseen expenses – If your car breaks down or you have sudden medical bills not covered by insurance, you can count on your emergency fund.
  • Gives you flexibility – If you have to quit your job but don’t have another in line immediately, an emergency fund could give you a financial buffer before you start earning a regular income again.
  • No need to invest – You would not want to withdraw your investments to cover unforeseen expenses. You risk selling at a loss because your investments may not have had time to mature. You will also have to pay more fees when you reinvest your funds later.

The golden rule: invest from 10% to 15%

The rule of thumb is that you should invest between 10% and 15% of your income. This means that if you earn 5,000 RM per month, you can invest at least 500 RM per month. Here are some ways to put that money aside:

  • Pay yourself first – Set up a recurring bank transfer that automatically transfers a percentage of your salary to an investment account when you get paid.
  • Incremental increases – If 10% to 15% of your salary seems like a lot of money, you can try to work on it gradually. Start by setting aside just 1% of your income this month. Increase this percentage to 2% the next month, 3% the next month, and so on.
  • Optimize your budget – If you’re still having trouble putting money aside to invest, review your spending habits. Consider reducing unnecessary expenses or increasing your income.

So, how much could you retire with, if you invest each month at the start of your career? We will make some assumptions:

  • You are a 22 year old graduate earning a monthly salary of RM 2,500
  • Your salary increases at the rate of 5% every year
  • You invest 15% of your salary each month

Here is how the calculation works:

Annual return
Portfolio size at age 55
622,794 RM
RM 726,615
853,463 RM

It can be difficult to set aside some of your money each month, especially if you don’t use it until decades later. But it will save you a lot of financial stress down the line.

Also consider your financial goals

You can also work backwards from your financial goals.

When it comes to retirement, think about when you want to retire and how much money you will need to retire. These factors determine how much you will need to save. For example, if you want to retire early at age 45, you will need to invest much more than someone who retires at age 55. To get estimates of how much you should invest, you can incorporate these variables into a retirement. calculator.

You also need to consider other financial goals. Maybe you want to educate your child abroad, buy a house by the sea, or take a quick trip around the world in your 50s. Suppose you want to set aside 200,000 RM for your child’s education in 20 years (remember you will have to factor in inflation as well – if we assume 2% annual inflation, that has the same power to ‘purchase as 13,594 RM in the present). Using an investment calculator, we can estimate how much you will need to save:

Annual return
Monthly contribution needed to achieve
200,000 RM in 20 years

So consider all of your financial goals, estimate the monthly contribution you will need to reach each of them and start investing.

And after?

Deciding how much to invest is only part of the battle. Next, you will need to consider the level of investment risk you can take. This helps determine what goes into your wallet. Equities make up a greater proportion of high risk portfolios, while safer investments like bonds represent a greater proportion of low risk portfolios. Young investors tend to have higher risk portfolios because they have a long investment trail to recover from setbacks. In addition, high risk portfolios tend to perform better over the long term.

But if you have just entered the workforce, investing in stocks immediately is difficult. Choosing individual stocks requires a lot of research and investment knowledge. And if you earn a new graduate salary – say RM2,500 – putting 10%, or RM250, in stocks each month will incur a steep fee. Stockbrokers in Malaysia charge a minimum of around RM8 per trade. This means that if you invest RM250, you will pay RM8, or 3.2%, in fees.

To mitigate the impact of these fees, some people save for months before investing. For example, if you save RM250 per month for a year, you will have RM3,000. A stock transaction of RM3,000 will result in RM8, or 0.26%, in fees.

You can also invest in financial products such as exchange traded funds, robotics advisers, and unit trust funds. They will usually incur lower fees if you plan to invest small amounts. They are also great for newbie investors, as they are less volatile than individual stocks and allow you to easily diversify your portfolio.

Whatever you choose to invest, be sure to do your research and avoid making emotional decisions.

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Jothi Venkat

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