Most investors struggle to find an appropriate answer to where and how to save money from salary. The general rule of thumb says that you should allocate at least 20% of your salary or income toward savings. Let’s take you through a systematic approach to investing your monthly salary.
1. Plan a Budget
Estimate your monthly budget. It should include fixed and unavoidable expenses (for example house rent, utility bills, and school fees) and discretionary expenses (for example vacation, entertainment, and hobbies). You should also set aside an emergency fund which is usually equivalent to 3-6 months of your salary. Decide how much you can save every month after excluding these expenses. This will help you to figure out the investment amount.
2. Do Financial Planning
Determine your short-term financial goals (new car or home) and long-term goals (retirement fund, children’s higher education). Analyze the amount of money you need to meet these goals so that you can consider investment instruments accordingly. You can also consider professional investment advisory services
to help you in financial planning.
3. Evaluate Your Risk Appetite
Risk appetite enables you to understand how much risk you are ready to take to earn returns. It depends on four factors:
1. Income (high income allows you to absorb setbacks)
2. Expenses (high expenses refrain you from taking high risks)
3. Age (high risk appetite in 20s and 30s, low from 40s and onwards)
4. Financial liabilities (loans, dependents)
5. Investing personality (conservative, aggressive)
4. Choose the Investment Option
Here are some investment avenues you can consider to invest your monthly salary:
Fixed Income Securities
Fixed income plans such as bank fixed deposits, post office deposits, Public Provident Fund (PPF), and National Savings Certificate (NSC) offer you a safety net. The risk of losing your money is negligible. However, returns are lower than other asset classes.
These securities are recommended if you are looking for stock market investments.
i. Direct Equity
When you buy stocks of a company directly from the stock market, it is direct equity. You can choose stocks according to market capitalization, sectors, geography, and other parameters. The returns from equity are higher than other investment options in the long run.
ii. Mutual Funds
If you are not comfortable investing in direct equity due to the risk of volatility, a mutual fund is a suitable option. An asset management company will invest in a mutual fund scheme on your behalf. This scheme can include equity funds, debt funds, or a mix of both. You can even consider Systematic Investment Plan (SIP) in which you can invest a small amount from your salary every month. A SIP return calculator
can help you to calculate the returns you will earn on SIP for a certain amount. It could be challenging to plan suitable investments as per your salary, especially if you have just started earning, are a stock market amateur, or lack time to do financial planning.
Ajmera x-change, a reputed equity and mutual fund advisor
can help you make the most of your salary to meet your financial goals.