Everyone wants an easy life and a stress-free retirement. However, many find themselves unable to build their net worth even though they have been saving and investing.
What is surprising is that while the stock market returns and inflation are two things outside of our control that affect how we will accumulate assets; there are really just three things that you control that determine what you will ultimately save. Salary, savings rate, and career length.
All three of them work together to determine how much money you will actually be able to put away for yourself. The vast majority of people do not realise how important these things are but making small changes to them can help convert a person’s modest savings and investments into millions of rupees over time.
In other words before going out to look for the next “hot” investment, it may be wise to ask if you are focusing on the numbers that will actually make up your financial future?
1. Salary: The Foundation of Wealth
The amount of money that you earn each month (your income/salary) will be the initial source of wealth that you create. The greater your income, the more you are able to save, invest and grow your assets over time. It’s not just about having a high income in the present – it’s about how your income increases over time.
Example:
- Person A begins by earning a monthly income of Rs. 50,000/month with an 8% increase in his monthly income every year.
- Person B earns a monthly income of Rs. 80,000/month with an 5% increase in his monthly income every year.
Although Person B has started off earning a higher monthly income than person A, due to Person A earning a much faster percentage growth rate, person A will eventually overtake person B after 20 years. Although Person B’s higher starting monthly income will give him more space to save and invest in the short term, he will never be able to close the gap between himself and person A.
Key Insight: Every additional Rs. 10,000 in monthly income earned can potentially equal Rs. 50 – 60 lakhs in the course of your working life, provided that you save and invest your money properly. So do not focus solely on your base salary but instead also think about getting promoted, increasing your skills, and earning some form of side income – these will all grow your monthly income and provide the potential ceiling for your overall lifetime wealth.
2. Savings Rate: The Multiplier
Having an abundance of money will not create wealth if you simply spend it all. It is your savings rate that multiplies your wealth (the actual percentage of what you take home from your job, and save). When you increase your savings rate, you compound your wealth faster.
Example:
- Person A earns ₹50,000 per month and saves 10%, which translates to ₹5,000 per month.
- Person B earns ₹50,000 per month and saves 30%, which translates to ₹15,000 per month.
Using a 12% investment return for a mutual fund for 30 years, we can estimate the amounts that each of Person A and Person B will have. The estimated amount of money that Person A will have is approximately ₹1.8 crores. The estimated amount of money that Person B will have is approximately ₹5.3 crores.
Even though both earn the same income, the outcomes are very different. Person A ends up with about ₹1.8 crore, while Person B builds nearly ₹5.3 crore. The higher savings rate alone creates a wealth gap of around ₹3.5 crore, showing how saving more matters far more than earning more.
Key Insight: Increasing your savings rate by threefold is much more powerful than increasing your earnings through slightly better market returns. Simply, discipline yourself to save regularly, automate your Systematic Investment Plans, and control your Lifestyle Inflation are simple methods to multiply your wealth over time.
3. Career Length: Time Is Your Greatest Ally
The power of time cannot be overstated as it multiplies the effect of a high savings rate and a good salary. As you add another year to your career, you have the chance to save more, invest more, and compound returns over time. However, this may not always be the case when one decides to retire too early without adequate financial planning; the consequences of a reduced or non-existent retirement fund will only get worse as time goes by.
Example:
- Scenario 1: Monthly Savings of Rs. 25,000 for thirty years at 12% Average Annual Return ≈ Total corpus of approximately Rs. 8.8 crore
- Scenario 2: Same monthly savings of Rs. 25,000 for twenty-five years ≈ Total corpus of approximately Rs. 4.7 crore
In both scenarios, the monthly savings amount is the same. Yet, saving for 30 years results in a corpus of about ₹8.8 crore, while stopping at 25 years leaves just ₹4.7 crore. The extra five years of saving and compounding alone make a difference of over ₹4 crore, highlighting the powerful role time plays in wealth creation.
Career duration affects salary and savings rates as well; the longer the number of years you continue to work allows for greater cumulative savings, and provides more years for income to be earned, resulting in greater savings potential. Although it is possible to begin saving late, increasing your career duration can make up for some of the time lost and keep you on track to achieve a comfortable retirement.
Key Takeaway: Time is not simply a number, but rather the greatest force multiplier of your salary and savings rate. Small extensions to your career duration can result in tens of lakhs, or even crores, over the long-term.
How These Three Numbers Work Together
While each individual factor (salary, savings rate & career length) has its own importance, the true power of these factors is in how they are used together. The combination of a higher salary, allows you to save more, a higher savings rate, makes sure your income is converted to wealth and a longer career provides compounding the time needed to grow wealth. Weakening any one of these can greatly limit your overall wealth during a lifetime.
Example:
- Person A = High salary, Low Savings Rate, Shorter Career
- Person B = Lower Salary, Higher Savings Rate, Longer Career
Although Person B earns less per year than Person A; Person B will likely have a greater retirement corpus because he has a higher savings rate that invests money consistently for a longer period of time. Therefore, many high earners feel financially unstable in their later years of life, while many lower paid individuals retire comfortably.
To summarise, you don’t have to be perfect on all three of these factors, but you do have to find a balance among them. For example, if you earn a salary that is growing slowly enough to match this slower salary growth, you can use a higher savings rate to offset this lower salary growth.
Also, if you start saving at an older age, you may want to consider extending your career. In addition, wealth is created by balancing each of these factors over time, rather than focusing on optimising one factor individually.
Lifetime wealth isn’t decided by market predictions or complex products. It is shaped by three simple numbers you influence every day — how much you earn, how much you save, and how long you work. Get these right, and even ordinary investments can lead to extraordinary financial security.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a qualified professional before making investment decisions.