Have you ever heard of the 50/30/20 rule of money?
If yes, have you ever wondered how it worked in practice or even tried to implement it?
The 50/30/20 rule is mostly used in personal finance for income budgeting.
Here’s how the rule applies: 50% of income goes to essential needs, 30% of income goes to wants, and 20% of income goes to savings and investments.
I’ve always wanted to try it out to see how it worked, especially with investing 20% of my income.
And I did put it to the test.
In this article, I’ll be outlining my experience and what I think about investing 20% of my income and reasons why it can or cannot be feasible.
Why I started Investing 20% of my Income
Living in Nigeria is truly an eye opener. I decided to stop keeping money in the bank and start saving and investing elsewhere due to the current price inflation raging the country.
I woke up one day to realize that almost all the essential products and foods that keep me going have skyrocketed in price.
In the last six months, the price of bread went up over 25%, most beverages went up more than 50% and table water went up by a whopping 150%.
This made me realized that if care isn’t taken, money in the bank could lose more than 50% in the coming months.
So, I had to start using the money fast and putting it in places where it could grow.
And that is why and when the 50/30/20 rule of money came to mind.
My Experience Investing 20% of my Income
Investing 20% of my income was so much fun, at least from the beginning.
And while I may not mention the investments I made and currently making, it was fun while it lasted.
Only that I had some hurdles along the way.
Here are some hurdles I faced:
My Investment didn’t fit my Short-term Goals
Investing 20% was fun until I realized that it didn’t fit my short-term goals.
The investment quickly grew that it became too tempting to touch. Unfortunately, I had no use for it in the short-term.
This is the kind of dilemma that would make someone liquidate part of their investment towards spending on expenses that are not necessary.
Lesson: Investing 20% of my income would have been perfect if I had short-term goals to meet. E.g vacation, rent, other projects or bulk expenses.
Liquid Investments are not good for the Long-term
I quickly discovered that keeping your investments liquid with an eye for the long-term is a recipe for disaster.
It demands a lot of discipline because the barrier to exit is pretty low, plus investing 20% of my income could add up quickly to become tempting.
It wasn’t long before I started having unnecessary reasons to liquidate.
Lesson: Keep long-term investments as illiquid as possible. Have a fixed investment timeline and stick to it.
So, is Investing 20% of your Income Feasible?
In my experience, investing 20% of my income seems feasible only for the short-term.
It could be a good way to pump funds towards a project or a bulk expense.
If I had a project to fund in the next three months to nine months, then saving or investing 20% of my income towards that would make sense.
However, investing 20% of my income for the long-term just seems too much. I need more room to enjoy my income while not feeling too much pressure with my investments.
Ideally for me, investing about 10% of my income would be just about perfect, as it would grow over time and there would not be a lot of immediate temptation to liquidate.
A Few Takeaways
If I was planning my investments for this year, Here’s what I would do:
I would first create my investment goals for the long-term and short-term, then I would match those goals with the right investments.
My short-term investment goals would be matched with liquid investment savings accounts with a plan to liquidate at anytime under 6 months.
I would invest about 10% – 15% of my income here with a plan to cover some short-term bulk expenses.
On the other hand, my long-term goals would be matched with illiquid or fixed-tenured medium-risk investments that span from one year to five years. I would realistically invest 5% of my income here.
My goal would be to put more money towards short-term investments while keeping them liquid. This could also serve as an emergency fund for me.
My long-term investments would have a higher ceiling and would most likely be reinvested overtime. However, I would be more conservative with my capital to avoid investment pressure.
Finally, I believe investing 20% of my income isn’t feasible for me. In the best case, I could edge towards 15% at most but not 20% no matter how much I earn or how excited I am with a particular investment.