Did you recently get an increase in your income? As a result, are you planning to buy a new car or contemplating a weekend getaway with family? Well, think again! Financial advisors say that investors are recommended to invest their additional income, instead of spending it on avoidable expenses, particularly of recurrent nature.
Your apprehensions to this suggestion may not be misplaced. After all, when you embarked on your SIP (systematic investment plan) journey, you were set to achieve your financial goals in time by adhering to the principles of compounding and investing discipline.
Why should you then raise your SIP now when you are all set to achieve your financial goals without having to do so?
Financial experts list out a number of reasons to clear your apprehensions and to raise the SIP:
Reasons for raising the amount of SIP
Inflation: The financial plans are designed based on the current rate of inflation. These plans could go awry if the rate of inflation in future turns out to be significantly higher than your expectation.
Achieving goals faster: Although you might achieve your financial goals without having to tinker with the plan or its methodology, but would not this be better if you achieve your financial goals a little quicker by increasing the rate of investment.
Uncertain future: Although we exercise great deal of caution while factoring in future uncertainties, the time ahead is still riddled with uncertainties. So, by raising the SIP amount, you can gear up with more resources and a stronger portfolio.
Making the most of compounding: Experts believe that raising investment in line with income enables investors to make the most of compounding. As income increases, the marginal propensity to save also moves upward, says Deepak Gagrani, Founder of Madhuban Finvest.
“As your income grows, it's important to increase your regular investments through SIP. This aligns your investments with your growing income and ensures that the compounding benefits accrue on a larger base, leading to a larger corpus,” he adds.
There is a tendency among investors to increase expenses in line with income. On the contrary, they should cap their expenses, and raise investment to achieve financial goals faster, says Sridharan S, a Sebi-registered investment advisor and founder of Wallet Wealth.
“If the financial plan was set to retire at the age of 60, one should raise the income so that one can retire at 55 instead,” he adds.
Renu Maheshwari, a Sebi-registered investment advisor and co-founder of Finscholarz Wealth Managers, echoes similar sentiments when she says that it is not feasible to achieve financial goals without raising the SIP amount regularly.
“SIP amount should be in line with the future financial goals. One may not achieve the goals without this increase. Additionally, as income rises, the capacity to save (& invest) also increases. This can automatically increase the monthly allocation to SIP,” she says.
While there is nothing wrong in spending a portion of additional income but one should be careful to keep the ratio of investment-to-income intact even after the increase in income. For instance, when you invest 40 percent of your income when income is ₹one lakh, you should maintain the same ratio after it rises to ₹2 lakh. This will raise your investment level from ₹40,000 to ₹80,000.
Gaurav Rastogi, founder and CEO of kuvera.in says that raising SIP regularly ensures that savings and investments grow in line with your income.
"Increasing SIP annually to match your annual increment ensures that your savings and investments are growing in line with your income. In the short term you don't spend the extra cash on impulse buys and in the long term you get to your financial goals faster. It is a win-win," says Rastogi.