How much liquidity do you need to maintain in your investment portfolio

22 Jun, 2017

Investing in anything requires meticulous planning and you need to have sufficient in your portfolio to fuel your future investments. Managing your current finances is as crucial as making the right investment. This is because if you don’t plan to prudently use the income then it will become difficult to make your desired investment.

There are certain tips you can follow to ensure that you have enough amount to spare on your investment options. When it comes to defining the best amount you should keep aside for investments, many experts have varying views. Just to make things clear to you, a few of them have been mentioned below.

The 50/30/20 Rule

Considering this rule, your income can be divided into three parts. 50% represents the costs which cannot be ignored and it is very important that these be covered. Half your income should technically be used for paying off your bills, EMIs etc. The 30% should be reserved for things like your food budget, daily necessities, clothing etc. The remaining 20% should be used for making planned investments. The financial goals which you have planned for should be covered under the remaining 20%. The 50/30/20 rule is a good example of how you could manage your money.

Cut at 15%

Many experts are also of the opinion that 15% of your income will be suitable to be used as the investment funds. The rest of the money should be used for your basic necessities and clearing of existing debts.

Consider the Emergency Funds

Times are unpredictable and therefore it is imperative that you keep a stock of your incomes as money for emergencies. This money should come from the 20% money you keep aside for investments. Many experts will tell you that you should have money equivalent to six months of expenses. However, it may not be possible for every individual to keep a similar amount as the amount required for six months expenses as the financial conditions may vary according to individuals.

Role of Cash

According to Warren Buffet, cash is like oxygen and people take it for granted when it is in abundance but as soon as there is a shortage of cash, people realize its true value. A study conducted by the United States by one of the oldest trust companies revealed that many people hold their portfolios is cash and that 8 out of 100 people have 50% or more portfolio as cash. This is because cash can be used in times of economic plunges, when all other assets cannot be used.

Keeping theright amount of money in your portfolio will help you to be prepared for adverse situations which may arise in the future. It will also help you from overinvesting and will prevent situations where investments go bad.  

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