What percentage of your paycheck should you put into Mutual Funds?

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There’s no doubt that mutual funds are smart investment decisions. The question is, how much do you need to put into mutual funds each month?

Many investors are uncertain how much money they need to put into mutual funds. There isn’t a magic number. Every investor is unique, and so are their needs and amount of income. Therefore, no one can invest at the same level. However, there are specific steps you can take to identify how much you can allocate individually, depending on your financial condition.

Define Your Financial Goals

You must have a list of future goals that you hope to accomplish. For instance, it could be buying the most recent iPhone, a new car, a home, a trip, retirement planning, etc. In the context of personal finance, these goals are referred to as financial goals.

You should be SMART (Specific, Measurable, Attainable, Realistic, and Time-Bound) while defining your objectives. Writing out your goals is a quick and easy way to find SMART objectives. To further simplify the process, you can categorise them into three categories—short-term, mid-term, and long-term. Goals that you wish to accomplish within a year are considered short-term. Your five-year goals are your medium-term aspirations. Long-term objectives are those you intend to achieve in 10 years or more. This will give you a fair idea of how much money you need to save.

Prioritise Your Goals

Being realistic with your goals is the next stage. Given your income, you might not be able to pursue everything you wish to accomplish. In this case, prioritising your goals is essential. For instance, paying off a personal loan early should come before planning a trip abroad. Similarly, top long-term needs that are 15-20 years far away could include retirement and children’s schooling. Therefore, these objectives should come first above anything else. Also consider inflation when investing. For instance, educational and medical inflation are very high. Even while calculating retirement goals, you should assume an inflation rate.

Calculate How Much To Invest

You are one step closer to determining how much you need to invest in mutual funds each month once you have determined your top priorities and when you want to attain them. Estimate the costs involved in reaching each of your goals in the future. In addition, create a budget based on your monthly income. Investing first when create a budget is generally better than spending the remaining money.  

Set Aside a Percentage From Your Income

Ideally, you should invest at least 20% of your income towards your future financial goals. Some of this money will go towards an emergency fund to be kept in liquid instruments. Some may go towards short-term and medium-term goals, while others go towards long-term goals. It is best to invest in debt mutual funds to meet your short-term goals and choose hybrid and equity mutual funds for your mid-term to long-term goals. Also take your risk-appetite into consideration. If you have a high-risk appetite, you may invest more in equity funds. If you have a lower risk appetite, a mix of debt and equity funds are more suitable. Equity investments are also beneficial because of the power of compounding.

In conclusion, how much you should put into mutual funds each month is a question with no right or wrong answer. Your investment should be determined by the monetary objectives you hope to attain and the amount of time you have to do so. Determine your goals, order them according to priority, and determine how much you must allocate each month to reach your objectives. Investing first, then using the remaining funds to spend, is a wise decision.  

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