Wednesday, March 20, 2019

How Much of My Monthly Income Should Go To My Expenses, Savings and Investments?

I received an email from a reader who has just started working about a year in his corporate career and he wrote to me asking the optimal allocation he should be allocating his monthly income to his Expenses, Savings and Investments.

This is hard to answer because first I do not know him well enough to give a detailed answer and second his circumstances and priorities may differ from one person to another.

So I'll try to give my best answer as much as possible and will have to assume a few things from him. I assume he is asking me because he read my article recently and would like to know what it takes to achieve Financial Independence as early as he could possibly.


The Generic Google Answer

If he or anyone has tried to Google and look for the genericly designed common answer on the Internet, it would advocate him to save 60% on his expenses, 30% on his savings or emergency funds and 10% on his investment.

The main reason for the high percentage allocated on the expenses is because I think the writer would have assumed most people start on a low base income, probably in the range of $1.8k to $2.5k. So when you add all the expenses including insurance premium, parents allowance, transportation, utilities, food and groceries and other discretionary items such as travel, it probably adds up to that 60%.

The rest of the 30% goes to Savings, which the goal is to build up emergency funds of up to 6 months worth of expenses. The idea to having an emergency fund is to cater to events that are unforeseeable and will have to prepare for it. For example, you might get terminated from your job because the company is reducing manpower and you might ended up having to survive a few months without an income. 

The last 10% goes to Investment, which is supposedly money that helps you grow your wealth so you can start allocating more to other division of your life jar.

My Personal Take

In my opinion, you've got to make your money works hard in all aspects regardless of whether they are being allocated to your Expenses, Savings or Investment.

If they are being allocated mostly to discretionary expenses for instance, make sure that is because you wanted to create a lasting memory with your friends or families. If you want to use the money to buy a bag, make sure that it gives you the happiness you are seeking for.

For money that is being allocated to emergency funds, make sure you find the best avenue to park your funds so they are liquid and earn some returns for you meanwhile. A good example for this would be SSB, or a high quality corporate bonds. Do not assume because they are for emergency funds you can leave them there lying around without work to do.

For investment, make sure you go for good quality companies that can grow and multiple your money positively. There are many instances where investors put their hard earned money in companies that make them suffer losses. 

Obviously with the least percentage being allocated to the investment pot, your wealth won't grow and compound as fast as there are other expenses bomb that tied you down.

My personal take is that since the reader is young and I assume he doesn't has any financial commitment yet at this point (financial commitments will only grow as he proceeds to his 30s later on), he should be trying to increase his investment pot as much as possible and make it a priority at his young age.

Sure, there are risks of not having sufficient emergency funds at this point, but given his lesser commitment because of his young age, I feel that tying down too much on his emergency funds could be slowing him down. But its a matter of balancing between the defensive and offensive and only he knows best what his objective is and what's his character is like.

Having one too much over another will not do him any good so he has to choose what's best for him.

I advocate a 40% expenses, 5% savings and 55% investments but thats because my objective is to be financially independent before the age of 35, so I have to take on bigger head and tail risks.

On chronological order, my priority was to increase my income base, tighten my basic expenses and needs and grow my investment pot, and this can differ from person to person. 

If the reader is a prudent character by nature and has a different objective than mine then he will not fit into what I did. 

And that is fine too because we are in a life of marathon and building our wealth is just one aspect, there are other priorities such as health and memories which can create a more lasting impact in our lives. 

I hope this helps the reader think about some perspectives on how he can allocate his funds accordingly to what suits him best. 


6 comments:

  1. Hi B,

    Long time... hope all is great. Still an advisor and always so helpful to your readers.

    Actually to be kind of crude, your answer will not really benefit the person not because it is not good answer. They are good answers, but because eventually like what you mentioned earlier, you do not know him well enough to give a detailed answer and second his circumstances and priorities may differ from one person to another.

    A lot of times we ask lots of questions, but the time should actually be spent on spending quiet time to think about it ourselves what suit us best, and what we really want. Advice is good when that person knows you very well and have a relationship.

    Hahaha.... I am still the same Rolf Suey huh...... :-)





    ReplyDelete
    Replies
    1. Hi Rolf

      Hope you are well :) long time no hear from our old fellow friends :)

      You hit it right on the nail.

      What I am hoping to achieve from the article is to throw the ball back to the reader to make him think and there clearly won't be an exemplary answer that would fit one for all. I'm giving him the what I would do in his shoes but ultimately he has to make that choices himself based on his circumstances :)

      Delete
  2. I'm also visiting this site regularly, this web site is really nice and the users are genuinely sharing good thoughts.



    Accountants in Toronto

    ReplyDelete
  3. Dear B
    Taking into account your plan to enter into a stage of early FIRE, possibly with the option of not going back to full-time work, what is the level of emergency funds or free cash (not invested into any instruments) that you have secured for your situation, without going into numbers if you are not comfortable?
    This because I have accumulated a sizeable portfolio of properties (six, of which four are currently tenanted out) and stock (in the multi-millions), with passive income from rental and dividends exceeding expenses by about probably 30%, but not sure what is the amount of cash buffer that should be sufficient. I have stored away an amount equivalent to about 10 months expenses, in liquid cash Thank you for the advice.
    regards
    Anon Andy

    ReplyDelete
    Replies
    1. Hi Andy

      You are obviously in the luxurious position to be in and an envy to most people to have the kind of assets you have.

      I don't really know your situation but I think you have already FIREd by definition. It is just a mental block you have for not taking the next step (if you are into the next step).
      From a cash flow point of view I also don't see how you would struggle with keeping up with the day to day.

      I definitely have lesser and keep lesser than you in terms of cash stored.

      Delete
  4. Dear B - Thanks, and had provided more info to your mini-retirement thread. Currently, about just over 50 with a kid in P4 and a wife part-time working. Took us almost 30 years of working, saving and investing, prior to the FIRE concept days and even pre-Kiyosaki. But, it got much easier, once you have sufficient assets and get into the asset churn and re-deployment. Also, much more courageous to enter during the crises times, given the higher base.
    You are prob right about the mental block. But, at 50 years, it is harder to come back, compared to say 35 years like yourself, should things not work out to plan. But, I think it is almost time. Question is - what next to occupy time, once you have solved the money issue. Even going on holiday and trips constantly, and I have seen the world many times over, can become like a job over time.
    Thanks and keep in touch
    Anon Andy.

    ReplyDelete

UA-57154194-1