In one of the earlier posts on Retirement Planning, I had discussed the importance of starting early, portfolio diversification and a few psychological investments to get you on right financial track. By starting early, you get the power of compounding behind you and your small (involuntary) contributions can result in a significant corpus by the time you retire. By diversifying your portfolio across asset classes (equity, debt, gold, real estate etc), you increase your ability to tide over underperformance of a particular asset class over a period. Flavor of the month approach does not work when it comes to investments. You need to get your asset allocation right and maintain investment discipline.
All the aforesaid aspects need to be taken care of. However, you still need to invest. It does not matter if you get obsessed with asset allocation over a portfolio of Rs 1 lacs when you need Rs 5 crores for your retirement in 15 years. Asset allocation will lead you nowhere in this case. You will struggle financially in your golden years.
It Is Plain Mathematics. You Invest More, You Get More.
Of course, you need to invest wisely too. I take this as an assumption in this post.
- Rs 2,000 per month for 30 years compounds to Rs 45.6 lacs at the end of 30 years.
- Rs 10,000 per month for 30 years compounds to Rs 2.27 crores at the end of 30 years.
You end up with 5 times the corpus if you invest Rs 10,000 per month instead of Rs 2,000 per month.
This is one aspect I have seen most investors struggle with. It is not that they are not investing. It is that they are not investing enough. The common refrain is that they don’t have enough left to invest after accounting for home loan EMIs and other monthly expenses. Such approach is never going to help. The corpus you need for retirement or for any other financial goal (children’s education, marriage etc) does not change just because you cannot save enough. You need to figure out a way to save and invest more.
Financial Goals Are Important
A number of investors are content investing only 5-10% of their monthly take home salary. I cannot put a number to how much you should save. However, 5-10% of your monthly take home income is on the lower side.
How much should you save? If you have set your financial goals properly, you can answer this question easily. If you know the amount needed to achieve a financial goal and time you have, you can make reasonable assumptions to arrive at the amount you need to invest per month. For instance, if you need Rs 50 lacs for your daughter’s education in 20 years, you need to invest Rs 6,530 per month for 20 years. I have assumed return of 10% p.a. If you have done these basic calculations, you will work doubly hard to make those contributions to your daughter’s education corpus. There will be many such goals.
Financial goals help you stick to investment discipline. If you have simply Rs 25 lacs lying in a MF scheme, you might be tempted to touch the corpus and use it for some other purpose. However, if you have that fund earmarked for daughter’s education, you will think twice before touching that corpus. This is perhaps one of the rare instances when your emotions can help you make better financial decisions.
How Do You Invest More?
The answer is quite simple. Either increase your income or control your expenses. Increasing your income may not always be in your hand. So, it boils down to controlling your expenses. In an earlier post, I had highlighted a minor psychological adjustment:
Most of us invest what is left after spending. You must do it other way round.
Income – Investment = Expenses RATHER THAN Income – Expenses = Investment
Easier said than done? Let’s find out how you can do that.
Start your Investment EMI
When you hear the word, the first thing that pops up in your mind is your home loan EMI. You attach great importance to your home loan EMI. It is your top priority. And you are right. Bank will take away your house if you don’t repay the loan.
Can’t you attach similar importance to your Investment EMI? I am talking about mutual fund Systematic Investment Plans (SIP) or any periodic investment. And I am not just referring to equity mutual funds. Depending upon your requirements, you can even invest in debt mutual funds or a recurring deposit. Franklin Templeton, an Asset Management Company, has been running a campaign calling SIP a Good EMI. And they couldn’t be more right. So, just like you attach great importance to your home loan EMI, attach equally high importance to your Mutual fund EMI (SIP). However, I wouldn’t just limit it to mutual funds.
How much should your Investment EMI be? I answered this earlier in the post. This is why you need to set financial goals. Otherwise, you will have flexible (or rather convenient) targets. You will invest Rs 2,000 instead of Rs 10,000. With financial goals and the amount needed to reach those goals, you know exactly how much to invest (with a few assumptions). It is easier to stick to investment discipline too.
Make your Investment EMI a non-discretionary expense.
Have Adequate Emergency Corpus
Many times, your investment discipline suffers because of a sudden unplanned expense. The financial emergency could be medical or loss of job or any other unplanned expense. That might force you to go slow on investments. In some cases, you might even have to liquidate existing investments.
To take care of such exigencies, have an adequate emergency corpus ready. It is difficult to answer how much is adequate. You can start with 6 months of expenses in a savings bank account, liquid fund or a recurring deposit. Monthly expenses include all your EMIs and regular monthly expenses. If you don’t have adequate health insurance (for any reason), your emergency corpus just got bigger. Do remember this emergency corpus needs to be replenished if you source any money from the fund. Adequate health cover is extremely important to counter medical exigencies better.
Track Your Expenses Better
There are two types of expenses viz. discretionary or non-discretionary. Non-discretionary expenses are those which are beyond your control and you can’t reduce such expenses. Such expenses would include your home loan EMIs, house rent, children school and tuition fees, utility payments etc. Some smart people even count their investment EMI as non-discretionary expense.
On the other hand, there are expenses which can be reduced if you want. Such expenses would include vacations, dinner outings, shopping etc. I am not saying these are not important. These are important too but should be controlled if needed. You need to sit down and make note of such expenses. You must know where you stand. If your take home income is Rs 80,000 per month and your non-discretionary expenses are Rs 35,000, you know you have Rs 45,000 to work with. It might sound something very basic. However, most people are not aware of their expense breakup. All they can say is that they don’t have much left to invest.
And this brings us to our next point.
Use Plastic Money & Automate Payments
Sometimes, it can be difficult to recall expenses incurred at the end of the month. This is especially true if you are paying cash. By opting for debit/credit cards for payment, you will get a very good idea about how you spent during the previous month by looking at your bank or credit card statement. This will help you track your expenses better. Though not very important, rewards points earned through purchases on debit and credit card can be used in the future.
Pay all the bills on time so that you do not lose out money to penalties. You can set up auto-debit for your utility bills, credit card payments and any other regular payments. This will not just help you avoid unnecessary penalties but you will also get a consolidated list of expenses at the end of the month (through bank or credit card statement).
Do note usage of credit card can be double edged sword. A number of people fail to realize how much they have spent on their credit card since they don’t have to pay upfront. If you belong to the same category, you will end up spending more. You must use credit cards prudently.
Keep it simple. Set financial goals. Invest to achieve these goals. Give investment EMI high priority. Build buffer around your investments through an emergency corpus and adequate health and life insurance. Track your expenses better and control discretionary expenses if required.
Got any other ideas to invest more? Do let us know in the comments section.