Where should I spend my surplus money is a frequently asked question by most of the people today.
We all want to ensure the safety of our money and want to use in times of need. We obviously do not afford to part with it. Zero-risk deposit is indeed the best place for it.
How much to invest- A Simple Formula
In order to find what percentage of your earnings should be invested, here is a simple and effective formula:
Before you think of investing, take into consideration two important things:
1. You should invest less than what you actually earn.
2. As an emergency fund you should have ample money to sustain your expenses for at least six months. So have a six months income back up.
Once you fulfill the above criteria, go ahead for investing your hard-earned money.
An Important Formula
The Formula is as follows:
This useful formula will enable you to find out what amount of money you should invest in mild, moderate and high-risk investment.
Low-risk investment
Try to invest half of your income in low risk investments.
High-risk investment
First subtract your current age from 100 and then divide it by 2. The amount obtained can be invested in high-risk investments.
How Much You Should Save and How Much to Invest
Well there are no hidden magical numbers to help you find the amount to invest and how much to save. There are few ratios to help you find the suitable answer:
Liquidity ratio
Liquidity ratio (Spare Cash+ Savings Account)/ Average Monthly Expenses.
This ratio will help you retain the emergency expense for your time of need. If you get three as the resulting value, it means your money is three times your average monthly expenses.
Opportunity Ratio
Opportunity Ratio (Spare Cash+ Contingency Fund)/ Net Salary
This ratio helps you to find out the idle surplus cash existing with you.
Savings Ratio
Savings ratio is calculated by dividing the amount invested per month by net salary.
Your investment requirements are guided by this formula.
Solvency Ratio
The solvency ratio determines the total assets divided by the sum of the total loan and other liabilities.
Keep these ratios and the investment formulas in mind before going ahead with the investment. What you require is a little care and a lot of thinking and calculation before you actually invest your extra amount.
