Financial planning is a very essential tool for wealth creation. Starting the planning early can give you an edge over the others. Being in your 20s or 30s is the best time to start your investments to secure your future.
If you don't know where to invest, mutual funds are a great option to start your financial planning. It is one of the few buzzing investment options these days. You do not have to have a lump sum amount saved to invest in mutual funds. You can make monthly deposits depending on your salary starting as low as ₹500 or ₹1,000 per month.
However, it must be confusing how to start, how much of your salary to spend, and how much to save. There is a very simple thumb rule to help you with that.
It is the 50:30:20 rule.
This rule was popularised by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan. It gives you a very basic structure to properly utilise your salary.
So the rule states that every earning individual should spend 50 percent of their salary for their needs, 30 percent for their wants, and 20 percent should be saved or invested.
In this case, needs represent rent, EMIs, utility bills, groceries, etc. These are the things that are very necessary for survival and have to be paid every month without fail. Wants that should constitute 30 percent of your salary are items that are not absolutely necessary and can be done away with if needed. Like movie expenses, eating out, gym membership, vacations, etc.
The third 20 percent should be invested or saved. Now in this, you have multiple options. you can invest the entire 20 percent in mutual funds. Or you can invest 10 percent in mutual funds and the remaining 10 percent can be saved for an emergency corpus.
If you can cut down your spending on your wants, you can allot a bit more funds to your savings/investment bracket. However, if your needs take more than your salary, you can allot some of your income to it from the wants column.
Let's look at an example
Suppose person A earns ₹40,000 per month.
50% of 40,000 = 20,000
So ₹20,000 should go towards the basic necessities like rent, bills, etc.
30% of 40,000 = 12,000
Then, ₹12,000 should be spent on wants like movies, gym, restaurants, etc
20% of 40,000 = 8,000
The remaining ₹8000 should be saved or invested.
In that ₹8,000, at least ₹4,000 should be invested in mutual funds, which is 10 percent of the total salary. The remaining 10 percent can be saved or invested depending on your financial goals.
Why Mutual Funds
Mutual funds have recently become a very popular form of investment. It not only gives better returns than your savings account but is also very hassle-free to invest in. You also do not need a Demat account to start investing in mutual funds.
Mutual funds also offer a variety of options to invest in depending on your risk appetite. There are index funds, sector funds, debt funds, multicap funds, hybrid funds, etc. for you to choose from.
However, one must note that equity mutual funds will be subject to market volatilities and though it is safer than investing in equities directly, it still carries risk.
Investing a small portion of your monthly income can go a long way into wealth creation for the future. It is important for you to remain consistent in your investment and keep increasing them proportionally as your salary rises.