If you are out looking for an answer to this question you are already on the right path.
We often get asked this question, and while there is no one answer, there are some rules that you can live by that will help you enjoy your salary, but at the same time invest for a brighter future.
Let’s look at the 50/30/20 rule. It’s easy to remember, and if this is your first time, a perfect way to start.
To understand the rule in its entirety, it’s important to use an example. Let’s take the example of John, an executive at a media firm with a salary of $50,000. His after-tax income, for the sake of understanding, will be around $40,000.
The first 50
Here, 50 refers to 50% of the total income after taxes, which in this case will be $20,000 which roughly translates to $1,667 per month. According to the rule, this amount should be reserved for your necessities. What classify as necessities, you ask? Rent, utilities, fuel or travel, food – basically anything you need on a daily basis to survive. It’s often seen that people end up paying a lot higher for rent and then have very little left over for the other necessities, and if you fall under that category, you must look at making some changes.
The next 30
This is the part where you enjoy life. The 30, like above, translates to 30% of your annual income after taxes. In this case, $12,000 a year, or $1000 a month. This money can be spent on entertainment. This includes movies, dining, travel, fun, shopping etc. Now, if you do find yourself not spending that amount, you can add it to the next 20, and if you find yourself spending more – it’s time you put a check on these activities.
The final 20
This is where the investment part comes in. The 20, in this case, is 20% of your annual income after taxes or $8,000 a year / $667 a month. It’s really not a big number, and we can all find a way to invest this amount each month. The question then is how and where to invest? We feel this comes down to you, and what you are looking for in an investment. As a start, you can look at mutual funds, stocks, government bonds that will help your money grow at a steady pace, however, make sure you have the right guidance when investing, as some options can lead to you losing your money. If you have a student or any other debts, this 20% needs to be used to pay those off as well.
The above rule is a general one, and as your income grows, you can decide to invest more while maintaining your lifestyle standard. However, as we said earlier, it’s a great place to start. Here’s wishing that you make the right choices and start investing today, it’s going to be great!