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  • Writer's pictureAkshay Nayak

Step It Up

Investing for long term financial goals requires us to display a lot of focus and discipline throughout the journey to the goal. Along the way, it is essential for us to do the controllable aspects right. These aspects mainly include developing a strategy to achieve the goal and saving and investing every month towards the goal. But one aspect that is fully controllable and yet ignored by most of us is that of increasing the amount we invest every year. And this is something that greatly impacts and improves our chances of achieving our long term financial goals. Therefore, in today’s post I’m going to talk about the importance hiking our investments towards our long term financial goals every year. I'm also going to talk about how it can be done and how it is beneficial to the process of achieving our long term goals.

To begin with, we must look to keep increasing our investments towards major long term goals such as retirement, financial independence, children’s education or children’s marriage by at least 10% annually. For example if we invest Rs 1,00,000 towards a long term goal in year 1, a 10% annual increase would mean that we invest Rs 1,10,000 (1,00,000 + 10%) in year 2, 1,21,000 (1,10,000 + 10%) in year 3 and so on. Of course, an annual increase by anything more than 10% is completely welcome, but a 10% increase is the bare minimum we need to incorporate. And the reason why we need to do this is simple. Inflation is a constant and omnipresent risk when we manage our money and plan our investments. Headline inflation numbers released by the government and the relevant apex organisations range between 4-6% on average. But inflation in personal costs and expenses at the individual level can range up to as much as 8-10% (depending on the cost of our individual lifestyles), which is quite significant. Therefore we need to ensure that our money stays a step ahead of inflation all the time. And the only ways we can achieve this is if our investments constantly deliver returns that beat inflation handsomely or we keep increasing the amount we invest at regular intervals. And given that investment returns are largely out of our control, the best way for us to beat inflation would be to increase the amount we invest at regular intervals. Doing so would mean that we constantly keep creating a larger base for the effects of compound interest to work on. It also means that our portfolios would produce satisfactory results even with moderate levels of return, which are relatively easier to achieve. And that automatically means that we reach our goals much more faster and efficiently. For example, for an investment of Rs 10 to grow to Rs 20 in 10 years, it would have to grow at an average annual rate of 10% over this period. On the other hand, an investment of Rs 18 would grow to Rs 20 at a rate of just 7% over the same period.

Now that we have understood the importance of increasing our the amount we invest at annual intervals, let us now look at how to go about doing so. The best and most sustainable way to increase our annual investments would be to achieve it through an increase in our monthly investments. There are two main ways in which we can increase our monthly investments. The first of them would be to channel periodic increments in our monthly income and any monetary bonuses we may recieve into our investments. For example, let's say I begin by investing Rs 20,000 every month with a monthly salary of Rs 50,000. One year later, let's say my salary increases to Rs 60,000 per month. This means that my monthly salary has increased by Rs 10,000 over the previous year. This increase of Rs 10,000 can go straight to my investments, meaning I now invest Rs 30,000 per month. This would represent an increase of as much as 50% in my monthly investments in comparison to the previous year (20,000 + 50% = 30,000). This mode of increasing investments would be best suited to salaried individuals since they would have a steady source of income which increases over time. One thing to avoid in such a case is needlessly spending our salary increments and bonuses. Human behaviour becomes extremely impulsive at the sight of an increased amount of money. Financial decisions made based on impulse are usually the ones that cause us the most financial damage. Therefore it is important for us to slow down and take a pause anytime we receive a salary increment or a significant bonus. The best way to do this would be to wait for 48-72 hours before deciding how to employ our increments or bonuses. It would help us make a more rational decision rather than an impulsive one.

Those of us who are self employed or entrepreneurs would predominantly be working with an income profile that is highly volatile, especially during the early years while we set up our business or practice. In such a case, the best way for us to increase our annual investments would be to rationalise our expenses and channel the money we save on our expenses into our investments. This method would also serve as an added boost to salaried individuals who channel their increments and bonuses into their investments. The best way to cut down our monthly expenses would be to prepare a budget and objectively list down how much we spend on each expense. Of course it would be hard to rationalise and control essential expenses and fixed monthly costs. But discretionary expenses such as eating out, entertainment and travel can definitely be rationalised. In fact, if we honestly budget and review our monthly expenses we would find at least one area where we spend more than we need to. Cutting expenses in such areas would free up a large chunk of money that can be saved or invested. For example, let's say I am an entrepreneur who is currently able to save and invest Rs 15,000 with an average monthly income of Rs 40,000. Let us further say that I eat out 4 times a month spending Rs 500 each time. Now, if I was to eat out just once a month instead of 4 times, I would be able to save an extra Rs 1,500 per month (500 * 3), which can go straight into my investments for the year. This would increase my investments for the year by Rs 18,000 (1500*12) which is equivalent to a little more than one month's worth of investments at the current rate of Rs 15,000 per month. And the biggest advantage of this method is that we would not be putting in any additional effort to generate this extra money. We would only be employing the money we already make more economically.

Of course, it goes without saying that the increase in our monthly and annual investments must be made in accordance with a pre defined asset allocation strategy, which has been derived in light of our financial needs and goals. But the most important takeaway here is that increasing the quantum of our monthly and annual investments is integral to our chances of achieving our financial goals. The reason behind this is simple. Achieving our financial goals is an endeavour that always has a significant element of uncertainty attached to it. But one aspect of this endeavour that is always completely under our control is that of being able to step up our monthly and annual investments at regular intervals. Doing this would leave our money relatively less vulnerable to the effects of inflation. And this would reduce our dependence on uncertain factors such as investment performance and portfolio returns in our efforts to achieve our financial goals. All of this would go to show that increasing our monthly and annual investments at regular intervals is one of the most valuable tools we have available to us to boost our chances of success when it comes to achieving our long term financial goals.

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