We've been talking to our community of investors about how they approach investing to understand the practical wisdom that these strategies often incorporate. We want to share one of these with you because it's so simple and elegant.
Our investor starts with his post-tax salary and divides it into 3 buckets:
- 30% for his EMI or rental,
- 40% for savings
- and the balance 30% for monthly expenses.
The 40% designated for savings is automatically moved each month from his salary account into investments. He invests in mutual funds through SIPs dividing the invested amount into equity (60%) and debt (40%).
The house he lives in is determined by the 30% allocation to rent/EMI. He is then forced to manage his monthly expenses within the 30%.
His annual bonus is used towards travel etc and large one-time commitments are paid by drawing on investments. As and when he gets a salary increase, he accordingly changes the amount for each bucket. He has been doing this for over a decade and feels this works well for him.
There are a million ways to optimise this and one could get into complicated allocation and investment options. But the most important thing is that "it works for him" and some simple math confirms that this would also meet his financial goals as and when they arise.
It's almost important to note that in this above approach our investor has incorporated the financial wisdom of ages:
- Spend after saving - not save what is left after spending
- Follow a disciplined approach
- Stick to your plan - don't get distracted by market movements into taking haphazard decisions
People are constantly searching for the best ways to manage their finances. Though there are several academic studies on the subject, recommending right strategies for people, our discussion with people suggest that people successful at this have arrived at their own ‘Practical Wisdom’ in managing their finances.
We have presented one such approach, but we are reasonably sure many of you have your own methods. We would love to learn about them and we're sure so would most of our readers. Please share in comments or write to us at blog(at)scripbox.com.