How Much Of Your Salary Should You Invest?

You don’t need to be wealthy to invest.

Quite the opposite, in fact. Investing is the easiest way to create wealth over the long run (apart from inheriting it!). It can help you reach your financial goals and build a nice retirement fund. It also helps you overcome inflation – that is, the increase of prices of goods and services, which makes the value of your money decrease over time.

If you’re a new investor, one of the first things you’ll need to figure out is how much to set aside to invest. Here’s how to get started.

An emergency fund first before investing

Before you start investing, make sure you have an emergency fund. Typically, this covers around six months of savings – more if you are self-employed. Keep it somewhere you can access it quickly, such as a savings account. Here’s why you need an emergency fund:

• Covers unexpected expenses – If your car breaks down or you have a sudden medical expense that isn’t covered by insurance, you could rely on your emergency fund.
• Gives you flexibility – If you need to quit your job but don’t have another one lined up immediately, an emergency fund could give you a financial buffer before you earn a steady stream of income again.
• Don’t have to dip into investments – You wouldn’t want to withdraw your investments to cover unexpected expenses. You’ll risk selling at a loss, as your investments may not have had time to mature. You’ll also incur more fees when you reinvest your funds again later.

Invest 10% to 15% of your income

The rule of thumb is that you should invest between 10% and 15% of your income. This means that if you earn RM5,000 a month, you could aim to invest at least RM500 a month. Here are a few ways you can set aside this money:

• Pay yourself first – Set up a recurring bank transfer that automatically moves a percentage of your salary into an investment account when you get paid.
• Incremental increases – If 10% to 15% of your salary sounds like a lot of money, you could try working towards it incrementally. Start by setting aside just 1% of your income this month. Increase that to 2% the next month, 3% the month after that, and so on.
• Optimise your budget – If you’re still having trouble setting aside money to invest, review your spending habits. Consider cutting down on unnecessary spending or increasing your income.

So how much could you potentially retire with, if you invested every month at the start of your career? We’ll make a few assumptions:

• You’re a 22-year-old fresh graduate earning a monthly salary of RM2,500
• Your salary increases at a rate of 5% every year
• You invest 15% of your salary every month

Here’s how the math works out:

Annual return	4%	5%	6%	7%
Portfolio size at age 55	RM622,794	RM726,615	RM853,463	RM1,008,976

It can be hard to set aside a chunk of your money every month, especially if you’re only going to be using it decades later. But doing this will save you lots of financial stress down the line.

How to save for your financial goals

You could also work backwards from your financial goals.

When it comes to retirement, consider when you want to retire, and how much you’ll need to retire. These factors determine how much you’ll need to save. For example, if you want to retire early at 45 years old, you’ll need to invest a lot more than someone who will retire at 55. To get estimates of how much you should invest, you could plug in these variables into a retirement calculator.

You should also factor in other financial goals. Perhaps you want to afford an overseas education for your child, buy a seaside home or go on a whirlwind world tour in your fifties. Let’s say you want to set aside RM200,000 for your child’s education in 20 years (remember that you’ll need to account for inflation too – if we assume a 2% yearly inflation, this has the same purchasing power as RM134,594 in the present). By using an investment calculator, we can estimate how much you’ll need to save:

Annual return	4%	5%	6%	7%
Monthly contribution needed to reach RM200,000 in 20 years	RM550	RM492	RM441	RM394

So consider all your financial goals, estimate the monthly contribution you’ll need to reach each of them and start investing.

Set your investment risk appetite

Deciding how much to invest is just part of the battle. Next, you’ll need to consider how much investing risk you can take. This helps determine what goes into your portfolio. Stocks make up a bigger proportion of higher-risk portfolios, while safer investments like bonds make a bigger proportion of lower-risk portfolios. Younger investors generally have higher-risk portfolios, as they have a long investing runway to recover from setbacks. Plus, high-risk portfolios tend to perform better over the long run.

But if you’ve just entered the workforce, investing in stocks right away is hard. Picking individual stocks requires a lot of research and investing knowledge. And if you’re earning a fresh graduate salary – let’s say RM2,500 – putting 10%, or RM250, into stocks every month will incur high fees. Stock brokers in Malaysia charge a minimum of around RM8 per transaction. This means that if you invest RM250, you’ll be paying RM8, or 3.2%, in fees.

To lessen the impact of these fees, some people save up for months before investing. For example, if you save RM250 a month for a year, you’ll have RM3,000. A stock transaction of RM3,000 will incur RM8, or 0.26%, in fees.

Alternatively, you could invest in financial products like exchange-traded funds, robo advisors and unit trust funds. They’ll generally incur lower fees if you plan on investing small amounts. They’re also great for beginner investors, as they’re less volatile than individual stocks, and allow you to diversify your portfolio easily.

Whatever you choose to invest in, make sure you do your research, and avoid making emotionally-based decisions.

This article has been updated on May 16, 2024.