How much should a 26 year old Invest each month?

In the last few years we have seen the personal finance space flooded with thumb rules. Everyone needs to save X, everyone needs to spend Y. But I keep wondering that the first word of personal finance is personal, meaning different for each individual. How can thumb rules be so conveniently applied across the board so easily? Generic advice is the worst thing that has happened to personal finance over the last few years. Now what I'll rather do is walk you through a framework so that you can arrive at how much you should be investing as a 26 year old.

Now the first thing is to figure out how much you earn. Now this might sound stupid but this number is straightforward only if you are in a job (if you are in a traditional job you can skip this paragraph). But I have many friends in family businesses who do not necessarily draw any salary from the business. That is the worst thing that you can do to yourself if you are joining a family business. We often see people taking out only that much money which is commonly known as "Ghar Kharch" in traditional language — meaning only expenses are withdrawn and nothing else. When you are doing this you are essentially betting anything and everything in your own business, which is not necessarily wrong — you should be betting most part of your finances in your own business rather than a mutual fund or an FD, but betting 100% of that? Umm, probably not a good idea. There should be some diversification so that god forbid if that business goes through a rough patch, your family won't be in a soup because you had all your bets placed on just one horse. Now to figure out how much you earn, be very honest with yourself and figure out that if this weren't my family business then how much would I have been paid to do the exact job that I am doing here? The key is to be honest. Once you've arrived at that number, add a bit more to that amount as a Privilege Premium :) There is nothing wrong in that — you should always take advantage of the privileges that god serves you. Once you have arrived at that number, make sure you withdraw that much amount from the business each month and manage all your personal expenses through that — your expenses, investments, insurances, all of that.

Okay so once you know what you earn, the next step would be to figure out liabilities. If you have any loans with absurd interest rates like 12-15%, the first step would be to clear these loans even before you think of investing. Imagine this — you are investing 100 rupees and earning 15% on that money, which trust me is on the upper end. And you eventually end up paying that 15% as interest and you keep doing this again and again without making any net gain. So that's the first thing you need to do — get rid of high interest loans.

Now lets say you've done that. The next step is to figure out expenses. Now I'll give context for both Nagpur and Mumbai because these are the 2 places where I have lived.

Lets say you're in Nagpur and you don't have any rent or house expenses to carry out (most people in home towns live with their family so this is a fair assumption to make). Lets say you're drawing a salary of 80k and have low interest EMIs of 20k, so after your EMIs you're left with 60k a month. Now if in a city like Nagpur you're spending 40k - 50k a month — without having any responsibility of rent, electricity, food or house help — I would genuinely make you sit down and ask you what is wrong with you? Such kind of spending is more of a psychological problem than a financial problem. I know of people who spend 15-20k on coffees in a month. I would largely label this not as a financial problem but as a sociological problem which you need to sit down and figure out. Ideally I would say that you should be spending somewhere around 20-25k a month in such a scenario. Even if you drink and play pickleball frequently, this number should actually suffice everything. And you should be managing to save anywhere between 35k to 40k a month in a city like Nagpur. That would be a good place to start.

Now if you're in Mumbai in a corporate job, the primary expense that you will have will be either rent or a home loan EMI. So lets say you earn 1,00,000 rupees a month and have an EMI of 70,000 — there is no way that you will be able to save anything out of that remaining 30,000. In a city like Mumbai the cost of living goes up significantly — house help, food, dining out etc. So in this case you end up without saving anything. Now a strange thing that I have observed is that people who choose to stay on rent — lets say paying 35k or 40k — don't end up saving that additional 30k (1L – 40k rent – 30k expenses). They actually start spending that on rubbish things and trust me, Mumbai has a lot to offer if you want to somehow spend an extra 30k a month. A better approach would be to back calculate — if I'm earning 1L then I should be investing atleast 20-30k, and based on that you figure out how much you have left for rent or EMI and find a house which fits that budget. You will be happier in a smaller house where you are living more freely than in a big house where at the end of each month you are struggling to make ends meet.

So that's that. You need to add the element of personal finance in figuring out how much you should be investing each month — that answer will be different for everyone. Thumb rules like save 30% of your salary don't work well, atleast for me, because if your salary is 2-3L that doesn't mean you need to necessarily spend that 70% of money :p. In Nagpur if you're drawing a salary of 2L without responsibilities, I would genuinely expect you to save 1.5L out of that — that's 75%.

I'm not saying never use that money — obviously you can't save money and take it to heaven when you die. You should always spend money on experiences which you truly want. But it doesn't make sense to spend that money on autopilot because you never sat with yourself and figured out how much you should spend or save.