How much money you should set aside from an investment

4 ideas on how you can spend your investment money

We’re breaking down some ideas for what you should initially do with that investment money, and then you can think about that yacht next to your new beach house. Take a look at our suggestions to make smart money moves

Diversify your investment portfolio

Before you do anything, think about it. You earned something from this, right? That means you’re doing something right. If you’re confident in where you’re putting your money, and that you will get results, go for it again.

But the thing you’re likely to hear from anyone giving financial advice is to diversify, so maybe avoid putting all your eggs in that same basket. Do your research all over again and use a chunk of the money you’ve made to make even more money.

But how much? Well, if we were to take the famed 50/30/20 budget plan, you could substitute the 50% ‘Needs’ amount for debt, more on that later, the 30% ‘Wants’ for anything you fancy, and the 20% ‘Debt’ for investments. Investment money is a good way to use a big chunk of money to get rid of debt fast, and not let it hinder any further future plans, so it gets upgraded in importance. If you’re following the 50/30/20 rule, the 20% can go to your new investment, so that you have enough to play with for what you want in the future and keep making money.  

So, say you were looking into investing 100k wisely, under the 50/30/20 rule, that would see 20k go back into investments, which would, if the markets respond favorably, make you more money.

Wipe away debt

As mentioned, that 50% chunk should go to debt first and foremost. If you have debt from healthcare, student loans, credit cards, etc. it’s important to get rid of it quickly. Wiping your debt will dramatically increase your credit score, and the two will then greatly increase your chances of getting approved for any future large investments, like a mortgage or business loan. Plus, debt has interest, which means paying more and more the longer it sits there. If you have enough return from your investments to get rid of your debt quickly, you should put it to that. Even if you have nothing left over, the path ahead is clear for more investments.

Put it away

Of course, that doesn’t mean you aren’t going to get sick or need a new car in the future and might therefore need either a sum of money to handle the situation or repay some debt. That middle 30% should therefore be put away for a rainy day. There are any number of things that can happen that cause you to fall into a debt hole, but if you are gaining a return on investments, you can put some away to make sure you’re covered for the next time round. If nothing else, it will give you some cover should the next investment venture fail.

Remember taxes

Remember that this isn’t likely to be free money. Nothing is.

Unfortunately, taxes are the bad news that comes with the good news that you’re actually earning something from your investments. Depending on how much return you’re getting and what type of investments those returns are coming from, there are various ways you can be taxed on this income. There is income tax to think about, capital gains tax, and stamp duty reserve tax.

Dividends from company stocks should be fine and pay out fully because the tax man has already taken his cut, so shareholders don’t need to worry. However, if you’re investing indirectly from mutual funds, exchange-traded funds, real estate investment trusts or limited partnerships, you’re not about to escape tax. How much tax you pay on capital gains depends on how long the security was held by the investor.

Conclusion

The 50/30/20 rule is just one of many budget plans out there, but it makes for a simple template that you can easily apply to any extra income that isn’t from your daily job, like side businesses, etc.