I earn $8,000 per month and I have $50,000 in savings. How Should I invest?
Answer by Dollar Bits:
The first question that I would ask you is how much of the $8,000 per month is available. Ideally, you would set aside at least 15% of your gross wages to invest for your future. Given that, I would hope that you would be able to invest at least $1,200 per month (that’s 15% of your monthly earnings.)
I would suggest that you divide that investment between am S&P 500 index fund and a bond fund or even just leave the money in a money market account. You can divide the money any way you choose. Most financial advisors suggest that you use this simple rule of thumb for the stock market allocation: 110 – your age. So if you are 30, you would put 80% in the stock market and 20% in cash or bonds. You would continue doing this until you retire.
Assuming a 7% annual return, if you were 30 and you were to retire at 65, you could expect to have amassed over $2.1 million. And that’s just assuming a steady $1,200 monthly investment. As you salary increases over the years, if you continue investing 15% of your salary, you are likely to have much more money when you retire.
This also does not assume any asset allocation adjustments. You could periodically (i.e. annually) adjust your overall portfolio to maintain your expected asset allocation between stocks and bonds/cash. Remember, as you age, the amount that financial advisors suggest that you keep in the stock market will steadily decline. In stead of having 80% in the stock market when you are 30, you would lower that to 70% when you are 40, 60% when you are 50, etc. You could make this adjustment every year, or you can only adjust you allocation every 5 years, or ten years… whatever you decide.
Also, you can minimize yearly capital gains tax issues simply by adjusting your annual contribution distribution. For instance, if you want to have a 70/30 allocation between stocks and cash, but the value of your portfolio has changed to 75/25 due to a strong performance from the stock market, you can simply choose to lessen the contributions to the stock market portion of your portfolio. The typical solution would be to sell some stock, but you would incur capital gains taxes as a result.
If you are 30 or younger, I suggest that you set the $50,000 aside. Keep a portion as an emergency fund; ideally you should have at least two month’s salary available. In your case, that would mean that you have $34,000 available. Use that to pay off any credit card debt and/or apply it towards a down payment on a house if you don’t already own one. Assuming 20% down, the $34,000 would only buy you a $170,000 house. Given that most homes today cost at least $300,000, you would likely need to set aside another $26,000 or so for that down payment. Try to carve off a little bit more each month until you have enough to purchase a home. Of course, your home payments should not exceed 36% of your gross wages. So you could afford to pay $2,880 a month for your home.
Assuming a 4% 30-year mortgage, you could afford much more than a $300,000 home, but you would need to set aside a lot of cash for a down payment. (For instance, if you bought a $500,000 home, you would need $100,000 down. You mortgage payments on the remaining $400,000 would be about $1,900.)
Congratulations on your $8,000 monthly income and the $50k in the bank, I hope that you are able to invest at least 15%. Best of luck.