We earn to live well. As earnings move up there is a desire to bump up the lifestyle too. Through the working life of a professional we see some moving from small towns to cities and others moving from cities to overseas. It’s true that often this stems from the job requirement, but the acceptance of this change is usually intertwined with a desire or hope that it also leads to a lifestyle upgrade.
A lifestyle upgrade in its most basic sense comes with increased spending on material comforts at the cost of building assets. While this is a logical progression as salaries improve and savings grow, make sure you are not rushing into a lifestyle upgrade at the cost of your current financial wellness and future security. In other words, don’t be in a hurry to buy that teak wood furniture, till you have taken care of your basic financial well-being.
Here is what you need to tick mark before the upgrades happen.
Ensure that an emergency fund is in place
An emergency fund is what the name suggests; money kept aside in a safe and stable investment or in your bank account, which you can then use if there is an emergency. Remember, an emergency will not come knocking, it will be a sudden large expenditure that you haven’t penciled into your lifestyle expenses.
It could be a medical emergency or money your parents or siblings need, a car accident or job loss or any such unforeseen event or situation that appears out of nowhere.
An emergency fund is your ability to deal with this situation without affecting the rest of your lifestyle and expenses.
There is no formula for how much you can keep aside for such a purpose. It would depend on various factors like the number of dependents you have, their medical condition, your monthly expenses and so on. It’s advisable however, to have some guideline on this and hence, the easiest is to equate your emergency fund with your monthly expenses. Twelve months of monthly expenses kept aside in a safe investment can make for a substantial emergency fund.
Don’t compromise on your wealth creation
Once you’re used to a particular lifestyle, it will be hard to shrug it off even later in life. Your ability to maintain this lifestyle and to maintain your life without depending on others, does depend on what you save and invest now. Once you retire and the income flow stops, you will need your investments to generate income. This can become a possibility only if you start investing regular today.
Retirement at 65 means, the possibility of another 20-25 years of good life without an income source.
You must pay attention to what you are saving each month and investing towards these no income years.
How can you get there?
Once both the above are taken care of from your monthly income, then get to the part of lifestyle upgrade. The question is how much should you be saving today, to cater to the emergency fund and long-term investment?
Let’s take on the emergency fund first. Of course, you will not be able to save an amount equal to your monthly expenses every month! Give yourself three years to build an emergency fund worth 12 months of expenses. This means you will have to keep aside 30% worth of monthly expenses each month. These are your monthly fixed expenses like home EMI, rent, groceries and so on. Usually, such expenses form 30%-40% of one’s salary. Which means you will be putting aside roughly 9%-12% of your salary every month for creating an emergency fund, at this rate it will take you three years to build it. If you want to escalate the pace, just save more.
Once you have put aside money for the emergency fund, put aside another 20% of your monthly income towards long term wealth creation. In all you will end up saving and investing roughly 30% -35% of your monthly income. If you can do more, it will lead you to your ability for lifestyle upgrade sooner than you expect and if you do lesser, then it will take longer.
You can get that luxury car you want and even the large sized refrigerator with an outside ice cube dispenser. It’s all possible, but be sure that it doesn’t come at the cost of your future lifestyle and ensure to the extent possible that contingencies that pop up now don’t wipe you out.