To build a sizeable corpus that would set you up for a comfortable life and retirement, you need to invest wisely, be financially disciplined, and control your expenses. You also have to factor in the effects of inflation that would every now and then threaten to undo your good work if you’ve not chosen your investment instruments wisely.
Both your income and expenses would increase exponentially in 20 years. And hence there is a tendency among investors to get upset looking at the size of their potential future expenses.
So for example, your monthly expenses are Rs 30,000 now. Taking the average inflation rate for the next 20 years as 6 per cent, you conclude your monthly fund requirements in 2036 would be approximately Rs 1 lakh – or Rs 12 lakh a year. You think to yourself: how on earth are you going to raise that much money for your retirement?
Here’s the thing: you can raise that money. All it takes is discipline and patience. And you need to break down this long, challenging journey into a hundreds of smaller, easy steps.
Here, we’re going to discuss how you can raise your first crore – all in a quick period of 10 years. For this, we assume that you take home an income of Rs 70,000 now. We assume that your income will grow at 10 per cent a year, as will your monthly savings.
Now, let’s get to raising your first crore.
One crore by 2026
Assume that you can meet your monthly expenses with approximately 50% of your salary (Rs 70,000). This leaves you with approximately Rs. 35,000 to save and invest.
Let’s start with Rs. 33,000 a month, annually increasing that amount by 10%. Let’s invest this in any investment instrument returning 10% annually.
So here’s a table showing how far investing that amount monthly will get you in 10 years.
All amounts in rupees.
To achieve 10 per cent returns for 10 years on your monthly investment, you need to take moderate risk with your portfolio. The under mentioned portfolio with a combination of various asset classes could achieve the goal with return expectation close to 11 per cent to 13 per cent:
-Invest in equity mutual fund through SIPs: 30 per cent of your total monthly investment. Return expectation around 14-18 per cent annually. Risk level: moderate to high. Funds to pick: large cap, bluechip.
-Invest in balanced funds through SIP: 30% of total monthly investment. Return expectation around 12-14% annually. Risk level: low to moderate.
–Invest in bank recurring deposit: 30% of total monthly investment. Return expectation around 7.5% annually. Risk level: none to low.
–Invest in index mutual funds through SIP: 10% of total monthly investment. Return expectation around 10-14% PA. Risk level: low to Moderate.
This above-mentioned portfolio is just an indicative one. You could consult an investment planner to create a plan further tweaked to your risk appetite and liquidity preferences.
Do note that the portfolio suggestion above derives its returns expectations from the performance records of various fund classes in the last five to 10 years. This information is available on various financial portals. However, past performance is no guarantee of future returns. And you must also factor in tax implications for any and all investment options by consulting your investment advisor and tax planner.
Focus and discipline
Financial discipline is key to building long-term wealth. You must repay your debts in a timely manner and avoid making them long-term. Also avoid unnecessary loans taking which could impede achieving your monthly investment targets. Try to manage your necessities within your financial capacities. Take insure to protect yourself and your family from threats to life, health, income, and property. Review the interest rates on your loans regularly so that you do not pay more than what is required. Take care of tax implications on your income by smart management while considering long term goals. Adjust your risk appetite from time to time to make the best of prevailing macro-economic conditions, thus helping you reach your goals quicker. Just to illustrate that point, this may mean locking in a long-term fixed deposits if interest rates have gone up, or buying equity mutual funds after there’s been a dip in the market.
People often forget factoring in future expenses when making long-term financial plans. Expenses increase in the long term due to added family responsibilities and the impact of inflation. You must consider expenses like, children’s education, marriage, family functions, vacations, etc. and also make an appropriate contingency funds to cover these situations.
Try and recognise your future expenses as short term, medium term and long term. Then, plan to meet them accordingly. Your short term expenses include daily and monthly expenses like credit card bill, electricity, telephone, education fees, supplies, etc. In the medium term, you have expenses that occur between once every one to three years, such as home repairs, annual insurance premiums, property tax etc.
Long term expenses can be ones that could occur over three years: buying property, buying a car, children’s higher education, marriage of a family member etc. Do not over emphasize on credit card usage and pay the card bills timely. Maintain records of expenses and plan systematically to maintain them at low levels. If your target is to save Rs 50,000 per month, then by managing your expenses smartly, you may be able to save more and therefore meet your Rs. 1 crore goal before schedule.
There’s a need to maintain a balance between the risk and return in your portfolio. Initially you can take higher risk as the invested capital is small. But as the corpus grows and you close in on your target, you must reduce your risks and secure the corpus by opting for defensive investment instruments.
You must take advice of a financial planner to plan the investment and expenses as per your risk appetite. Review the plan at various stages to ensure its successful execution. Be also prepared to tweak your plans if the need arises.
The author is CEO, BankBazaar.com