Oftentimes, you will hear that the right amount to invest is 20%, and the other 80% is spent on needs and wants. That is the 50/30/20 rule is based on the 2005 book “All Your Worth: The Ultimate Lifetime Money Plan,” which was authored by Elizabeth Warren, a current US senator, and her daughter Amelia Warren Tyagi. However, most FIRE Activists beg to differ that 20% invested will take too long before getting the ability to retire and recommend 50% to invest instead. Read on to find out why saving & investing 50% of your income is critical.
Saving & Investing Definition
Savings is the money that remains after expenses and other commitments have been subtracted from income. Savings are the sum of money that would otherwise be lying about, not being risked on investments or used for consumption. Any method for producing potential future revenue might be referred to as an investment. Buying bonds, equities, or real estate property are a few instances of this. A property that may be utilized to create things can also be bought and regarded as an investment.
When you save money, you can often access it when you need it (or after a period of time). When you invest, there is a chance for bigger long-term profits or rewards. However, there is also a slim chance of loss when you did not invest in the right asset.
Is a Saving Account an Investment?
Oftentimes, people question whether an HSA (high-interest savings account). Even though HSA does provide interest in your capital. To be classified under investments, the asset class must have an amount of risk associated. As a result, an HSA is not considered to be an investment and is not so classified.
Difference between Investing and Gambling
It’s true that both investing and gambling include risk and decision-making, especially the risk of capital with the expectation of future gain. But although gambling frequently has a brief lifespan, investing in stocks may have a lifetime. Additionally, over the long term and on average, gamblers might anticipate receiving a negative return.
What should an Investment Portfolio look like?
An investment portfolio usually consists of asset classes such as real estate, stocks, shares in a mutual fund, and crypto. Most financial advisors would recommend having a diversified portfolio from different sector classes. Having a diversified portfolio reduces the downside risk and allows, investors, to restructure their portfolios with better ease.
The Power of Saving & Investing half your Income
People usually ask how much should one invest in their money, and the common answer is 20%. Have you asked yourself why 20% is the recommended investment amount? Here’s the truth, 20% invested will take you 37 years before having the ability to retire. By then, most would have already reached retirement age and are not able to work as productive. A well-known finance blogger Mr. Money Mustache illustrate the different level of savings rate and how they can help speed up your financial retirement.
As shown above, the ability to save up 50% of your income to retire in your mid 30 and 40 is powerful. It allows individuals to not have to work another 20 years of their life. To know more about how to retire early, a movement called FIRE movement which stands for Financial Independence Retire Early has become quite trendy in recent years. It depicts the millennium and Gen Z are now aiming to live a more minimalistic lifestyle and be financially free early.
To be financially independent through saving & investing. Individuals who have the power to invest 50% of their income will definitely be able to retire early. These individuals either know ways to increase their savings rate, increase their income, or are able to properly invest their income. If you would like to know more about investment, do have a look at our Investment 101 page or subscribe to get notified on any newsletter.
Utilizing your Retirement Account
The greatest neglected tax-saving strategy that most people are unaware of is using retirement funds. Given that retirement accounts are designed to invest the money that would have otherwise been taxed, this is quite a shock. One of the most effective strategies to achieve FIRE is to understand how to use and invest with your retirement account. Each nation has its unique retirement plan. There are six different types of retirement accounts available in America, the Roth IRA is the most well-known. We are lucky to have two different types of retirement accounts in Singapore. They are the CPF (Central Provident Fund) and SRS (Supplementary Retirement Scheme).
Building Side Hustle
The average millionaire has over 7 streams of income, many of them started these income as a side hustle. A side hustle is a great way to build an additional source of income without having to spend much effort. You may earn extra money by doing anything from giving professional service to renting out your excess time. Heck, you can even start selling worn or unwanted stuff on apps such as Carousell or eBay.
If you would like to learn more on how to build a side hustle or start one, be sure to check out our Side hustle 101 page. We provide all the information you need to start a side hustle that would suit you.
Setting Retirement Goals aim to improve Saving & Investing
Knowing how much to invest and what to invest in can be extremely powerful when setting retirement goals. If you have a long way before retirement, investing into higher growth may be the better choice in building wealth. As you reach near retirement, having a safer investment portfolio will great secure your invest to retire with.
Investing half your income is not for everyone
While investing 50% of your income does accelerate your financial retirement, not all will be able to do the same. One of the main dangerous decision this generation face is lifestyle inflation. As you make more money and build more saving, the need to spend it on luxury item is tempting. By learning to resist short term temptation using the 24 hour rule (if after 24 hours you still would like to buy the product, buy it) or learning to live a minimalistic lifestyle, any individual would be able to retire early.