Increase investments periodically in line with salary to meet your goals

Most double-income couples today have a wide variety of financial goals: vacationing at exotic locations, buying a car and a home, kid’s education, and providing for retirement. The list of goals is long and saving and investing for all of them usually appears a daunting task. There is one solution to this issue, though. Both you and your spouse’s income will grow, and so will your capacity to save and invest. If you increase your investment in tandem with the rise in your income, goals that appear insurmountable at present will become achievable. 

People are reluctant to start investing early because they have high aspirations and believe they will not be able to meet their goals, as their income falls short. “People wait to fall in the ideal income bracket to start saving and investing. However, one must start saving and investing as early as possible. Start with a small amount now and increase it gradually. This will help you inculcate the long-term approach to investing and enable you to build a large corpus,” says Milin Shah, head, product development and planning, HappynessFactory.in. Adds Rachit Chawla, founder and CEO, Finway: “Start early and invest regularly. If investments increase with time, that is a very healthy sign.” 

Increasing one's investments periodically is essential for a variety of reasons. The first is inflation, which increases the price of everything you consume. What may appear easy to achieve in today’s price terms may prove too costly once you factor in inflation. An MBA degree that costs Rs 15 lakh today will cost Rs 38.9 lakh after 10 years, at 10 per cent inflation. 

The second reason is lifestyle inflation. Over time our standard of living changes, as we aspire to live better. For example, a person may want to buy a car after completing a year in job, even if he was happy commuting by public transport in his college days. To be able to enjoy the same standard of life after retirement, one needs to keep hiking the amount invested. 

The third factor is rising income. As you progress in your career, you earn more, and can hence save and invest more. “Identify the amount or percentage by which you want to increase your investments. This should typically be in proportion to the salary hike you receive each year,” says Shah. 

Investors also need to provide for financial shocks. Things do not always go as planned, and hence one needs to build a margin of safety. 

Finally, you need to enhance your investments to maximise the benefit of compounding. The interest earned today also starts earning interest and the corpus, along with the principal amount invested periodically, increases at a faster pace. The longer the tenure, the higher will be the compounding. 

An example will demonstrate the benefits of hiking one’s investment periodically. Ramesh is able to save Rs 10,000 every month after meeting all his expenses. To support his current lifestyle he needs a corpus of Rs 54.63 lakh when he retires in 15 years. At 12 per cent annual rate of return on equity mutual funds, Ramesh has to invest Rs 11,480 each month to reach his target. If he invests Rs 10,000 per month for the next 15 years he will be able to accumulate Rs 47.59 lakh. But if he increases his SIP by 10 per cent at the end of each year, he will be able to create a corpus of Rs 82.74 lakh. Even a 5 per cent increase per year will create a kitty of Rs 61.91 lakh at the end of the 15th year.