While most people’s income grows each year, the majority of them do not think too much about increasing their investments each year. There is no denying that expenses increase due to inflation and lifestyle creep. But increasing investments consciously each year is something that doesn’t get the importance it deserves.
I recently was talking to a young cousin of mine who invests in mutual funds. About 5 years back, he started a monthly SIP of ₹15,000 when he was earning ₹75,000.
But after a couple of job switches, he now earns close to ₹1.75 lakh per month but his SIP is still ₹20,000 per month. So, while his savings ratio earlier was 20% (= ₹15,000 / ₹75,000), it has now dropped to 11.5% (= ₹20,000 / ₹1.75 lakh).
Ideally, as income increases the investments should also be increased.
Let me show you how increasing your investments by a small amount can help you accumulate a surprisingly large amount in future and also, how it helps you reach your financial goals sooner.
Suppose you start a monthly SIP of ₹20,000 for the next 15 years. Assuming that your investment grows at an average of 11% per annum, you will accumulate a corpus of ₹92-93 lakh in 15 years. In this example, you will be keeping your monthly SIP fixed at ₹20,000 only.
Now consider increasing your SIP amount every year by 10%. In this case, you will have a much larger ₹1.59 crore! No doubt, you would have invested more too in the 2nd example. But that is because you increased your investments as your income also increased.
So that is how a small increase in monthly SIPs each year can really change the game and accelerate your wealth accumulation. And if you combine this increase with periodic lump sum investments when markets are down, it will really turbocharge your overall returns and wealth accumulation in the long term.
And while we took 10% as the example to step up the SIP each year, it is not necessary to do that. You can go for smaller increases of say 5% as well. Nothing is too small and something is better than nothing.
So, let’s say you get a salary hike of 12%. Now assuming your expenses also increase due to inflation by 5%, you should try to increase your investments by 5-7% to keep your savings rate the same as earlier and not unnecessarily increase your expenses.
Extending our earlier example further, if you increase the SIP by 5% instead of 10%, you will still end up with ₹1.21 crore which is more than the constant SIP accumulation of ₹92-93 lakh.
And if you are unable to increase the SIP by a percentage each year, try to increase it by a few thousands every year or two. Say you start with ₹10,000 SIP.
So next year, try to increase it to ₹12,500. After that year, try for ₹14-15,000. If your income hikes are good over the next 1-2 years, you can even push for ₹20-25,000 in monthly SIPs.
Stepping up your monthly SIP to match your rising income is the best way to surely accumulate a large corpus over a period of a few years. Nowadays, quite a few mutual funds offer the option to automatically step up your SIP each year by a predetermined fixed percentage or an amount at periodic intervals. But if not available, you can do that manually yourself.
And before we end, do remember that while increasing your investments is a good idea, you should first prioritise having a sufficiently large emergency fund in place. If that is not there, then first use your income hikes to increase the contingency buffer and then increase your investments via step-up SIPs.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.