There are numerous investment strategies available today. Whether you want to try your luck with growth stocks, a long-term value approach, or even day trading, you have a multitude of options to fit your goals and lifestyle. However, talking investment strategies is one thing — budgeting for your investment strategy is another conversation altogether.
While there are dozens of ways to budgeting your funds, we’ve selected our favorite tips to make your investment goals fit your financial life.
Budget Tip #1: Determine Your Investing Goals
The first tip to keep in mind as you budget for your investments is to know why you’re investing.Are you budgeting for a specific goal, such as buying a car or house? Or do you plan on carrying your investment portfolio into retirement so it can provide for you through your golden years?
Whatever you answer here will help you determine how much you can afford to invest — plus how much you need to invest to meet your goals.
For instance, if you want to maximize your long-term earnings to live the high life come retirement, you may want to tuck away as much as you can afford. However, this plan means that you may sacrifice some luxuries now to bask in luxe later.
Many people opt for a more balanced financial life, wherein they sacrifice no more than they have to live comfortably — but not excessively — come retirement.
Budget Tip #2: Consider Your Financial Obligations
Considering your financial needs goes hand-in-hand with determining your investment goals. After all, if you set unrealistic goals for yourself when it comes to investing, you’ll quickly find yourself short on cash to cover your daily financial obligations.
For instance, many people know that the younger you are, the more volatility you can handle in your portfolio statistically. This means you can afford to invest in companies that may go under but will provide you with substantial returns in the meantime — which is great on paper if you’re looking to scrape enough out of the stock market to buy a car in the next five years.
However, if you’re $100,000 in debt at age 22, taking huge positions in the market is not realistic for your situation. The stock market is a risky endeavor — there’s no such thing as a sure bet, even on giant, well-established corporations. Thus, throwing your extra funds into the stock market instead of paying down your debt responsibly increases your financial risk.
Most 22-year-olds don’t have $100,000 in debt, but many do have a decent student loan obligation to pay off over the next ten years. These loans will pile on top of regular payments such as a car loan, mortgage, or monthly rent.
All of these payments have to be factored into both your short- and long-term financial plans — including when you’re calculating your investment budget.
Budget Tip #3: Consider Proportional Budgeting
Once you know what your investing goals and financial needs are, you can start looking at making a budget. There are a few ways to get started, but they basically boil down to:
- Take account of your income and output, cut what you don’t need, and set reasonable limits
- Take an existing budgeting model and arrange your finances to fit inside
Proportional budgeting falls under the latter category. Essentially, instead of budgeting limits for specific categories, you divide your spending into three broad groups:
Needs: Everything required for you to survive, such as food, shelter, healthcare, and transportation. Note that, while food is definitely a necessity, eating out five times a week is not.
Wants: Subscription accounts, multiple cars, and the newest smartphone fall under this category. However, items such as laptops and smartphones may be required for your job or to function in everyday society. That being said, it’s possible to meet these needs at a reasonable price.
Savings and investing: Anything tucked away in a bank, retirement account, or investment portfolio.
Before you can decide how to adjust your finances to fit this model, you first need to audit your finances. To do this, determine what your household brings in after your employer accounts for taxes. If you’re responsible for paying taxes yourself, such as is the case for freelancers, calculate how much you should set aside each month. The leftover is your take-home pay.
Once you know what your net income is, you can simply apply your particular proportional budgeting model over the top and adjust accordingly.
The 50/30/20 Plan
One of the most common proportional budgeting outlines is the 50/30/20 Rule, wherein you apply the numbers straight down the line:
- 50% of your net pay covers your needs
- 30% of your take-home goes to your wants
- 20% of your budget is locked away or invested
This model may seem restrictive to some, while others may find the idea of spending 30% of their monthly income on games and clothes positively luxurious.
Either way, abiding by this model — so long as you truly save and invest 20% of your annual income — is a popular way to ensuring you have plenty of funds for the future without compromising your lifestyle unreasonably.
The 80/20 Plan
However, there are some circumstances where the 50/30/20 model isn’t feasible. For instance, those who fall below the middle-class tax bracket, as well as those who have special financial circumstances, may not be able to afford 30% of their paycheck toward nonessential purchases.
In these instances, there are other common budgeting proportions to examine if you still want to invest toward your future while you pay your bills.
For example, if you have more expenses, such as from student loan payments or caring for a larger family, you may want to consider the 80/20 plan instead. This is a common alternative to the 50/30/20 Rule that simply combines needs and wants into a single category.
For those who choose the 80/20 plan, the best way to ensure you stick to it responsibly is to immediately invest or save 20% of every paycheck and pay your bills off the remainder. Whatever you have leftover is yours to spend as you please!
Other Proportional Budgets
If this model doesn’t work for you numbers-wise — or you don’t have the discipline to limit your entertainment spending on your own — you can design a proportional budget for your needs.
For example, if you have low expenses but high debt that you’re eager to pay down, you can design a budget with limited entertainment spending and high needs spending. A 70/10/20 budget may fit this need and still allow you to invest.
On the other hand, if you’re most concerned with tucking funds into your retirement and investing accounts, a 30/10/60 budget may fit your financial situation better.
However you decide to split your finances, the key is to set reasonable proportions and stick to your budget. (That means no dipping into your Needs fund to cover your next trip to the golf course, Larry).
Budget Tip #4: Look Beyond the 50/30/20 Rule to Invest
There are other ways to ensure that you set aside investing dollars in your budget every month. However, sometimes this means taking care of other, more pressing obligations first.
Deal with Your Debt
Case in point: the debt avalanche budget.
If you have thousands in debt and interest eating away at your retirement dollars, this is one of the best ways to pay down your debt quickly. To tackle your balances, simply start by listing your debts from highest to lowest interest. Then, make paying down the debt with the most interest a priority and settle for making minimum payments on the rest of your accounts.
This method is most effective if you can reduce your nonessential spending in favor of making bigger payments. By making a few financial sacrifices now, you’ll drastically decrease the amount you pay in interest over time.
All that being said, it’s important to treat yourself for your discipline and hard work. Be sure to book the occasional spa day to pamper yourself!
Invest Extra or Unexpected Monies
If you don’t have a lot of debt and you want to increase your investment budget, you may consider investing any extra cash you happen to come into. From work bonuses to tax returns to that $50 from your latest eBay sale, every dollar tucked into your portfolio is a dollar invested in your future.
While you shouldn’t count on these funds to comprise the entirety of your investing budget, adding a few hundred dollars here and there is a great way to boost your retirement account or new car fund.
Budget Tip #5: Automate Your Savings
Automating your saving is another great way to ensure your budget is investment friendly. There are a few different ways to approach the automation process, such as:
- Setting up automatic payments from your paycheck into savings or investing accounts
- Downloading financial apps that round up your purchases and tuck the difference into the stock market
- Paying into an employer-sponsored retirement account
Any or all of these methods can help you save for your future — and once you get started, you’ll hardly know the funds are missing.
Automating Your Retirement Savings
While investing in your savings and retirement accounts isn’t as exciting as building your stock portfolio, these accounts can provide less risk and more stability than the market. The best way to budget for your retirement is to skim the funds off the top of your paycheck — before it hits your bank account, if possible.
For instance, if your employer offers a 401(k) match, consider setting aside the minimum amount to receive the maximum annual match.
Alternatively, if you want to invest in an IRA account instead of (or in addition to) a 401(k), automate your payments so that the funds come out of your paycheck before you have a chance to check your balance on payday.
Of course, even if you dedicate funds toward a retirement account every month, you should still try to invest a few dollars in other accounts for the sake of a diversified portfolio.