35% of Indian investors are strategizers, those who are willing to take calculated risks. 31% are sharp (and sometimes over-smart) and take bold risks.
The rest 34% are mild risk takers with investor personalities of protector, researcher-alone, and seeker.
There are still many investors hesitant to invest anything more than what is necessary for their day-to-day expenses.
If you’re one of those people, we strongly urge you to reconsider. Investing just 20% of your income can have a huge impact on your future wealth.
In this blog post, we’ll discuss why it’s important to invest 20% of your income and some tips on how to get started:
50:30:20 Rule
Table of Contents
The 50:30:20 rule of investing is a great way to ensure that you are financially secure. This rule states that-
- 50% of your income should be allocated towards your needs which are essential for your daily life,
- 30% can be used for wants that are not absolutely necessary but can make your life better,
- 20% should be put aside to invest in stocks, bonds, ETFs, and mutual funds.
This method helps you stay mindful of each financial decision you make and provides sufficient resources to cover expenses while allowing some room to invest. By following this ruleset, it becomes easier and more achievable to become financially independent.
Let’s take a look at some numbers: On average, investors who allocate 20% of their income to investments have seen an average annual return of 7-8%.
In addition, longer investment periods often result in higher returns. A 10-year period can potentially yield returns of 10-12% annually.
Allocating your income according to the 50:30:20 rules of investing can be a real game-changer when it comes to creating a stable financial foundation.
1. Beat Inflation By Investing
Inflation is an economic reality that prices are going to go up over time. One of the best ways to fend off rising prices, and even make money, is investing.
By putting money away each month into investments, you can earn returns on your funds that are greater than the inflation rate. Additionally, many assets come with built-in tax benefits which is a great bonus. Investing can help you grow your wealth while still enjoying the effects of inflation protection.
Strategies that can help beat inflation
- Diversifying one’s portfolio is key, as it ensures an individual does not put all of their eggs in one basket. Active portfolio management ensures that your investments are spread out correctly for maximum benefit.
- Reinvestment of dividends and profits can have a positive effect on both short and long-term returns. Each of these strategies is incredibly valuable when beating inflation, and before you know it, you would be already compounding your earnings and securing a financial future.
- Investing in mutual funds is a great opportunity to start making money work for you. If you open free Demat account, it gives you access to start investing in mutual funds custom-made for your needs and charted goals.
2. Investing In Long-Term Planning
Investing your money can lead to great returns over time with long-term planning, particularly due to the power of compounding.
Compounding is when the rewards of investment are reinvested meaning they begin accruing more interest and generating more earnings.
Let’s say
you started investing 10000 INR every month for 3 years.
After one year of compounding at 10%, this would turn into Rs. 1,32,000 INR for further investment.
At the end of two years, the amount doubles to 2,66,000 INR, and by the end of three years with an annual return of 10%, the amount becomes 4,21,000 INR with an investment of 3,60,000.
This means that if you are investing 20% of your income, this amount quickly begins to generate incremental returns as more and more money gets reinvested.
In 2022, retail investors infused 1.6 lakh crore INR in direct equities
Consequently, retail investors’ holding in the National Stock Exchange rose to a 15-year high of 9.7% and it’s expected this trend will continue.
Comparatively, data shows average wages are increasing at a 3% rate year after year, proving that with reliable long-term planning and wise investment strategies, individuals can receive profound benefits from compounding returns.
Calculating returns on investment (ROI) is one of the smartest things you can do for your business. Below are a few methods of calculating ROI:
- ROI = Net return on investment / Cost of investment x 100%
- ROI = (Final value of investment – Initial value of investment) / Cost of Investment x 100%
In the last decade, The stock market in India saw major gains. It observed record-high investments of 23.6 trillion INR. That’s a significant jump from the 13.8 trillion INR invested at this time last year! Meanwhile, average incomes for citizens haven’t kept up with the same momentum.
In 2011-12, more than half of people’s financial savings were in banks. But the next year, that number went down to less than one-third. With increasing interest rates, there may be a partial recovery in it.
Over the past decade, Indian household savings has increased in high-risk instruments like mutual funds (MFs) and equity stocks, owing to the banks which started offering lower returns.
By the fiscal year 2021-22, the accumulated financial assets invested in MFs were less than 1/5th of the stock of household bank deposits. However, this comparison is only indicative, as the value of MF holdings fluctuates with the performance of financial markets.
If you are looking for the best way to invest 2,000 per month, then considering a Systematic Investment Plan (SIP) may be the best option for you. A SIP is an investment strategy that allows people to invest small amounts regularly over a long period of time. By investing through SIPs, investors can benefit from the power of compounding and also benefit from rupee-cost averaging in the long term.
3. Generational Wealth Creation
Generational wealth creation is the best way to ensure that future generations in a family have enough money to live comfortably with financial security. It involves careful planning, informed risks, and adopting strategies that have been set up ahead of time in order to accumulate and grow assets that can be passed along from generation to generation.
Investing in real estate and the stock market can make you more money over time, Investing in rental properties and renting them. For 20-year-olds to create generational wealth today by setting aside a portion of their income to start investing in mutual funds every month.
Investing 2000 per month can make a huge difference over time – by utilizing compound interest, one’s investments could grow 7-12% year after year as long as smart investment decisions are kept up.
Additionally, we would highly recommend you invest in upskilling programs with high ROI. some of them include upskilling in fundamental analysis, investing strategy, and asset management.
4. Having Cushion Assets for Rainy Days
Investing in certain assets is an excellent way to prepare for the unexpected when it comes to relocating abroad and miscellaneous costs such as weddings, emergency health care, and education expenses. With stocks, bonds, and ETFs all providing different ways to diversify your portfolio, you can make a smart decision that suits your particular needs.
Taking the time to invest wisely today builds long-term wealth over time so that should you need to cover any of these costs in the future, you don’t have to worry about how many terms insurance you should buy or how high-interest rate debt will eat into your savings.
Investing in reliable assets protects your financial security and gives smart individuals peace of mind knowing their future is taken care of.
Having a viable amount of liquid currency is essential beyond having insurance. It serves as the buffer when unexpected costs arrive, such as how much should I invest in sip or how investing gets you covered with less dependency on loans for when relocating abroad.
5. Make Mistakes, Learn More, Grow More
Starting in your 20s will buy you enough time to make mistakes, suffer some recoverable losses and understand what core metrics work for you in deciding on stocks.
By the time most people out there start investing, there are already earning way more than a 20-year-old and put money in stocks which reap bigger losses at the cost of a relatively less number of learnings.
Also, investing in your 20s will help you build the investing discipline which is still very undervalued. In this age of wanting quick returns and using that synonymously to ‘smart’ investments, investing in your 20s will save you from bursting that bubble which says that following the herd will reap you the same benefits which the early adopters had.
Conclusion
Though no one-size-fits-all investing 20% of your income is a great way to start. By utilizing the 50:30:20 rule of investing, you can beat inflation, create generational wealth, and cushion assets for rainy days. Use Zerodha to open your Demat account, and kick-start investing right away. Build your financial muscle, fiscal well-being and peace of mind.
Remember, don’t stress over the percentages; instead, focus on creating and growing wealth over time. You can do this by tracking your progress on Zerodha or Angel Broking. Taking small steps toward success is not only important but also rewarding.
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