Start setting up your money for success

Before you start investing there are several questions that should be answered such as how much money can and should you invest? What do you need and what do you want and how do you actually figure all this out?

About cash buffers and planned spendings

Let’s have a look at how much money you actually should invest. Here it is good to have a look at your already existing savings and your monthly income.   

From your existing savings you should always keep some money on the side (the so-called cash buffer) for the unexpected moments - a broken washing machine, getting laid off from the job, new furniture - you name it. For all these unpredictable moments in life, it is essential to have cash aside so you don’t have to touch your investments for that.

For the cash buffer you should reckon 4-6 times of your typical monthly spendings. 

Next, think about your planned spendings in the upcoming 1-3 years. Do you want to buy a new car or have a bigger vacation in mind? Since long-term investing is a key factor for successful investing, you should keep that money in cash because the time frame is simply too short to really rely on investments. 

The cash you have left after deducting your cash buffer and planned spendings from your existing savings is the money you can use for your investments.

50/30/20 rule 

We have now covered your existing savings, but what should you consider when trying to invest monthly? The 50/20/30 rule is a rule of thumb that can help you build a financially sound budget. It splits your monthly income into three categories: needs, wants and savings 

Using the 50/30/20 rule, you allocate your after-tax income into

50% Needs 🍲

Needs are everything essential to you, everything you can’t live without. This includes things like: 

• Living
• Groceries
• Electricity/Water etc. 
• Insurances 

30% Wants  🎊

Wants are things you desire but don’t really need to survive. Basically living life. This can include

• Hobbies
• Dining out
• Vacations
• Day Trips 

And last but definitely not least 

20% Savings 💸

This includes the money you set aside for your financial goals. This can include

• Saving for a house
• Retirement planning (e.g. pillar 3a) 
• Investing

An example

Let’s say we have a monthly netto income of 4,500 CHF.

Needs: CHF 4,500 x 0.50 = CHF 2,250

Wants: CHF 4,500 x 0.30 = CHF 1,350

Savings: CHF 4,500 x 0.20 = CHF 900

In this example there would be CHF 900,- that could be used to invest every month. You see, no finance degree needed. This simple calculation can be done without it. 😉

The 50/30/20 rule is in general a good way to figure out finances and to help getting a hand on a topic that can become overwhelming very quickly. Of course you should always take these kind of rules with a grain of salt. There is a bit of a grey area when trying to put everything in your life into just three categories, some groceries could be seen as wants instead of needs or some people want to have a bigger threshold for their savings etc. 

Now we covered how to set your money up for success and what needs to be considered before starting your investments. Next time we’ll have a look at how to start investing. How much risk are you willing to take but even more important, how much can you take? What’s the right approach? Coming soon - in a cinema close to you … oh, wait.