Trying to save 2x by 35 is an excellent target. It creates the solid platform upon which your wealth creation will accelerate with compounded growth.
Recently, there was an intense debate on the internet on how much millennials should save before attaining the age of 35. The debate was triggered by a financial website based in the United States. It said the ideal amount to save by 35 is 2x your income at 35. For instance, if you are earning Rs 10 lakh at 35, your savings by 35 should be at least Rs 20 lakh. Trying to save 2x by 35 is an excellent target. It creates the solid platform upon which your wealth creation will accelerate with compounded growth.
No thanks, they say
The article was directed at American millennials, who immediately clapped back saying it’s an impossible target. In the US, the youth ares saddled with student debt which sometimes remains unpaid even when they are well into their 50s. As per the report, Americans in their 30s today are going for larger homes (implying bigger loans) and also having expensive weddings which cost $35,000 (`23.62 lakh) on average. Therefore, large debt and expensive lifestyle leave them little to save for retirement. But what about the Indian youth?
Is 2x really possible?
Yes, this is possible. The key to achieving this challenge is to start saving early, being disciplined, and investing for the long-term through a well-selected investment plan (such as an equity mutual fund scheme). You can then hit the 2x target with ease. Also, Indian youth have lesser trouble than their American counterparts navigating debt from higher education and home ownership. In India, families remain invested in their children’s futures well into their 20s and 30s. Therefore, it allows them a greater possibility for higher savings.
Let’s start off with some basic assumptions here. You’re 22 today. Your income will grow at a steady 10% every year. It doesn’t matter what your actual income at 22 is, as long as it grows 10% annually. You have 13 years before 35. You need to invest only 15% of your income every year. The 15% number is key. If you fall short, you’ll struggle to reach the 2x goal. Now, you need an investment plan that will provide average returns of at least 10% every year.
Equity mutual funds
For this, equity mutual funds are ideal. Let’s say you start a monthly Systematic Investment Plan (SIP) with a fund that will deliver 12% annually over the 13-year period. You will comfortably hit the 1x mark by age 27, and 2x mark by 33. In the illustration, we’ve taken the example of a person starting to earn Rs 2.4 lakh a month at 22, getting increments of 10% every year and reaching an income of Rs 7.53 lakh by 34. By age 35, his savings will be Rs 18.19 lakh, which is 2.42x his income at that age.
The critical thing about this investment plan is that if you start it late, you’ll fall short of your goal, or you’ll have to invest more in the time left. For example, if you have zero savings till 28, you’ll need to invest 30% of your income to be at 2X by 35. If you started at 30, you’ll need to set aside 40% for the same target. Moral of the story? Start early, start small, and be wealthy in your 30s.
(The writer is CEO, BankBazaar.com)