How much of my income should I invest to reach Financial Freedom?
Do you want to escape the Rat Race?
Do you want to reach financial independence through investing?
Are you investing enough to reach your goal?
What is your Investing Target?
If you’re wondering “how much of my income should I invest?”, first you must know that your investment target is a function of your specific needs and circumstances.
Only you know how much you earn from your job, how much you spend, the lifestyle you want, how much you’re willing to sacrifice to reach your objective.
Anyway, it’s generally considered a good idea to save 20% or more, of your income.
But saving is not enough. You don’t have only to save your money.
If you want to reach financial freedom, your hard-earned money doesn’t have to be in a checking account.
You must put your money to work.
You have to invest it in a proper way.
- mutual funds,
- Rental Properties,
- digital assets,
The choice is yours.
You may also choose to invest in your education.
In this way you can expand your skills and knowledge, to have access to better forms of investments.
A simple rule to save and invest: The 50/30/20 rule.
There are different rules of saving.
One of the most popular is the 50/30/20 rule.
Senator Elizabeth Warren popularized the so-called “50/20/30 budget rule” (sometimes labeled “50-30-20”) in her book “All Your Worth: The Ultimate Lifetime Money Plan“, thinks that the best way of saving your money is the 50/30/20 rule.
The 50/30/20 rule is one of the most common ways for a well-structured family budget.
This rule says that you can use half of your monthly income to pay for your needs, (food, housing, transport, etc)
The other 30% is for leisure and other non-essential purchases.
The remaining 20% should be saved and invested.
The 50/30/20 is a reasonable guideline, but if you are serious about achieving your financial freedom, this rule should be considered only as a starting plan and you’ll have to save and invest in a more aggressive way.
You can do this by spending avoiding spending your money to buy useless stuff, lowering your cost of living, renouncing all unnecessary expenses.
Once you’re really focused on your journey to FIRE, your savings objective must be way higher than 20% of your income, at least 35-40% of your total monthly wage.
Emergency fund. Why you should have it.
According to Dave Ramsey, one of the most important American personal finance personalities and the author of the book “The Total Money Makeover”, before you start investing it’s necessary for you to have an emergency fund.
This fund is in cash, and it must be used only for extraordinary reasons (e.g. medical bills, unexpected home expenses, car repairs, etc. ).
A good emergency fund is necessary to avoid the accumulation of big credit card debts, for expenses related to extraordinary and unpredictable events.
How much big should be my Emergency Fund?
You’ll need anywhere between 3 and 6 months of living expenses saved up, but this basically depends on your lifestyle.
If you can easily cut unnecessary expenses, you can set a 3 monthly expenses fund.
If you can’t, then you’ll have to put more money into it.
Your emergency fund should be immediately and easily accessible when necessary, so you should choose a low-cost checking account in your bank for your cash money.
Conclusion. How much of my income should I invest? Saving, Budgeting and Investing Tips.
Saving, budgeting, and investing is not an impossible thing to do, so don’t give up.
First determine what’s wrong with your expenses, lifestyle, and habits.
Second, save some good cash for the bad times.
Third, invest the surplus.
Be careful: invest properly your money, according to your risk tolerance and expected ROI (Return on Investment).
One last – but extremely important- thing to remember when investing your money: “the higher the risk, the higher the reward”.
So, if you want a higher ROI, expect a higher risk.
An old rule in economics, says, “There Ain’t No Such Thing as a Free Lunch”
If you are in trouble, here are some things that can help you to start your journey to Financial Freedom in the right way.
- Cancel unnecessary subscriptions (Netflix, Spotify, Apple TV, etc.)
- Automate your retirement plan contributions.
- Eliminate your bad habits (cigarettes, alcohol, ect)
- Seek and eradicate unnecessary expenses;
- Move into a cheaper house;
- Don’t buy expensive cars;
- Repay your debts;
- Use the 50/30/20 Rule to determine how much to invest;
- Build/acquire new assets and revenue streams
- Invest properly your money ( Etf, index funds, stocks, bonds, REITs, Rental Properties, etc), according to your risk tolerance.