How to Budget for Your Investments

How to Budget

Including investing in your budget is one of the best things you can do to build your wealth over time. By allocating a set amount of money each month, you can take advantage of the power of compounding interest and dollar-cost averaging over the long term. Here’s what you need to know about budgeting your income to ensure you have enough for investment activities.

Budgeting for Investment With the 50/30/20 Rule

The 50/30/20 budget rule offers a simplified approach to budgeting and investing. According to this rule, you should spend 50 percent of your income on food, housing and other essentials. 30 percent goes to non-essential wants, and the remaining 20 percent goes to saving, investing, and debt repayment.

This rule is very simple to follow and can be an extremely useful tool when it comes to constructing a budget. To show how the rule can help people build wealth, consider the example of a 35-year old bringing home $4,000 per month. Using the 50/30/20 rule, this person would budget $2,000 for housing, utilities, groceries and other essential payments. $1,200 would go to wants, such as clothes and dining out. The remaining $800 would go toward financial goals.

As you can see, the amounts going toward investing in this scenario are not enormous. Let us suppose that the person in question is depositing $500 every month, into an investment that returns an average of 7 percent per year. Plugging these numbers into a compound interest calculator, we find that over 30 years the investments can grow to over $566,000.

This scenario assumes that the person in question has no money invested at the start of the 30-year period and never gets a raise, which would increase their ability to make higher monthly deposits. Since most people increase their earnings over their working lives, the end result would likely be far better than the example shown above. This is actually one of the benefits of the 50/30/20 rule. As your income increases, the amount you invest will also increase proportionately.

Now, let us compare these results to someone who invests but does not budget adequately for it. To keep the comparison fair, we’ll use the same time period and average rate of return as the previous example. Despite not having a regular budget, we will assume this person manages to put an average of about $100 per month into his or her investment account over time. Using this lower number, the person would retire with only $113,000. Unlike the first example, a better outcome is not as likely since this person will not automatically invest more when his or her income goes up if he is not abiding by a budgeting structure.

As you can see, following the 50/30/20 rule is a good way to budget for investing and allow your investments to grow along with your income. With that said, you should keep in mind that it is a guideline and should be adjusted based on your financial situation. Simply creating a budget with room for investment is a good first step toward achieving your financial goals.

How to Save Extra Money for Your Investments

As you may have guessed, you have the option to increase the amount you invest by reducing spending elsewhere. Even small increases to your investment budget can add up to large amounts of money by the time you retire. Some simple ways to save more money include:

  1. Bringing your lunch to work instead of eating out
  2. Cooking in larger batches for extra meals
  3. Looking for free or low-cost entertainment options
  4. Canceling subscriptions you do not use enough to justify the spending

As you can see, it is very easy to build room for investment into practically any budget. If you are interested in starting an investment plan tailored to your budget and goals, consider using NBK Capital SmartWealth. This simple but powerful robo advisor can help you find an investment plan and risk level that suits your income levels, while also allowing you to make smaller monthly deposits after your initial investment.

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