How much of my salary should I invest in ETFs?
Generally, experts recommend investing around 10-20% of your income. But the more realistic answer might be whatever amount you can afford.
Investing 15% of your income is generally a good rule of thumb to meet your long-term goals. Even if you can't afford to invest that much today, you can still start investing with what you can afford. Your investment amount may fluctuate as your cash flow changes, but staying consistent can pay off in the long run.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
A common rule of thumb is the 50-30-20 rule, which suggests allocating 50% of your after-tax income to essentials, 30% to discretionary spending and 20% to savings and investments. Within that 20% allocation, the portion designated for stocks depends on your risk tolerance.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
For example, if the average yield is 3%, that's what we'll use for our calculations. Keep in mind, yields vary based on the investment. Calculate the Investment Needed: To earn $1,000 per month, or $12,000 per year, at a 3% yield, you'd need to invest a total of about $400,000.
The most common way to use the 40-30-20-10 rule is to assign 40% of your income ā after taxes ā to necessities such as food and housing, 30% to discretionary spending, 20% to savings or paying off debt and 10% to charitable giving or meeting financial goals.
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course ā like any investment ā ETFs also come with risk.
What is the 50-30-20 rule?
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
Some experts recommend withdrawing 4% each year from your retirement accounts. To generate $500 a month, you might need to build your investments to $150,000. Taking out 4% each year would amount to $6,000, which comes to $500 a month.
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
| TICKER | NAME | % Change |
|---|---|---|
| BND | Vanguard Total Bond Market ETF | 0.318% |
| SCHD | Schwab U.S. Dividend Equity ETF | -0.488% |
| VTI | Vanguard Total Stock Market ETF | -0.154% |
| IJR | iShares Core S&P Small-Cap ETF | -1.145% |
One of the easiest passive income strategies is dividend investing. By purchasing stocks that pay regular dividends, you can earn $2,500 per month in dividend income.
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A well-constructed dividend portfolio could potentially yield anywhere from 2% to 8% per year. This means that to earn $3,000 monthly from dividend stocks, the required initial investment could range from $450,000 to $1.8 million, depending on the yield.
The Rule of 69 is used to estimate the amount of time it will take for an investment to double, assuming continuously compounded interest. The calculation is to divide 69 by the rate of return for an investment and then add 0.35 to the result.
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
What is the 70 20 10 budget rule?
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
The one time it's okay to choose a single investment
You wouldn't ever want to load up your portfolio with a single stock. But if you're buying S&P 500 ETFs, this is the one scenario where you might get away with only owning a single investment. That's because your investment gives you access to the broad stock market.
| Symbol | Name | 5-Year Return |
|---|---|---|
| FTXL | First Trust Nasdaq Semiconductor ETF | 24.01% |
| IYW | iShares U.S. Technology ETF | 23.99% |
| XSD | SPDR S&P Semiconductor ETF | 23.98% |
| FTEC | Fidelity MSCI Information Technology Index ETF | 22.78% |
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
