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Tuesday, November 7, 2017

I Make 36k A Year: How Much Should I Invest?

Recently graduated with a starting pay of $36,000 a year and you are wondering how much you should invest? Regardless of how much money you make, the amount you invest each year should always be based on your financial goals. Your financial goals not only provide you with a target to achieve, they also provide the motivation to stick to your financial plan.

Given the annual income of $36,000, the ideal amount that you would like to invest maybe constraint by the ever-rising living expenses. But remember when you were young, the same you were able to save every little penny so that you could to buy yourself a PS1 (for #YourFinanceDoctor's case) or whatever toy that you would want.

So what's missing now? Goals and a plan!

If you set you your mind on your goals, you should be able to achieve, just like how you did it before. With the four key financial planning steps here, you can find out exactly how much to invest in the beginning and have a plan for reaching your goals through the gradual increases in the amount you invest. 

For the purposes of illustration, this particular case involves a 25-year-old, earning $36,000 per year with an expected income increment of 3% per year.

Begin With The End In Mind
At age 25, you may only have a few goals you want to achieve, which could include preparing an emergency fund, purchasing a car, buying a house and probably retirement fund. Okay maybe not, most of you may not have think about retirement yet, but trust me, you should!

Well, this is a lot to accomplish with just $36,000 income and it might sounds scary to you. Nevertheless, you should not let your current income constrain your financial goals since your income will increase gradually over the years. You just have to list down all your financial goals and sort it according to your priority and urgency.

The financial goals you set have to be a SMART goal, namely, specific, measurable, achievable, realistic and time bound. So for example, assume one of the goals you want to achieve is to retire at the age of 55. So a SMART goal will be "Monthly Expenses of $5,000 (based on present value) After Retirement at Age 55". After all the calculations, you will know exactly the amount needed to prepare for each goals. 

Lazy to do it yourself...? Hire #YourFinanceDoctor today!

Create a Plan
The most common mistake many people make is that they roughly determine (a.k.a agak-agak) their saving amount, in other words, they save what's left after all the expenses. Like the wise man always said, spend what is left after saving. Common sense? More like common mistake. 

As you would expect, there could be no money available for investing when expenses run high in particular month. But people who are intent on achieving their financial goals reverse the process and determine their monthly expenses around their savings goals. Which is why the wise man is one of the billionaire! 

So if you are required to save $1,000 monthly to achieve your financial goals, make this amount as your first expenditure. With the advancement of internet, it would be easier to do if you set up direct debit authorization from your bank account for a qualified investment plan. This forces you to manage your expenses on $1,000 less each month.

Maintain a Healthy Financial Ratio 
With a financial plan where all your incomes, expenses, assets and liabilities are being analyzed, you would be able to know all your financial ratios and more importantly, how to improve if the ratio is not healthy. Percentage on each category of expenses are equally important too so that you understand where your money goes!

The financial plan would acts as a monitoring tool where you know your exact budget for each items so that you would not overspend. Most financial advisers would recommend saving at least 10% to 15% of your annual income, but #YourFinanceDoctor would advise you to save as much as you can! So, $1,000 a month amounts to 33% of your income, which is healthy considered you just started out with not much commitment.

Invest According to Your Risk Profile
After knowing your investment amount through financial plan, you need to know your risk profile too! Understanding your money may not be enough as you need to understand yourself too. Be it a risk taker or a risk adverse, there are always different option of investments suitable for you.

At a younger age, you have a longer time horizon, which may allow you to assume a little more risk for the potential of higher returns. As you are nearer to your retirement age, you then may want to reduce the risk in your investment portfolio by increasing the allocation in fixed-income investments. 

Having a well diversified investment portfolio may also effectively reduced your investment risk. Over the time, your investment portfolio allocation should be evolved according to your risk profile at different life stages.

There isn't a definite answer to the question on how much one should invest as it varies from one to another depending on your financial goals. But as a rule of thumb, it should be at least 10% to 15%. Another common mistake to avoid is to remember to increase investment amount according to your yearly income increment. Salary increases, lifestyle improves, same goes to your investment too! 

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