The key to a good financial life is financial planning. Most of the financial blunders we do are stemmed from impulse decisions. Decisions that are not well thought of and are taken in the spur of the moment. In this email we will discuss one such situation that many of us encounter.
Many times our income increases through a variety of sources. It could be a Diwali bonus, a salary hike, a freelance project etc. In such situations, we do not really have any plan on how to spend it. Now again, as we have mentioned many times before, deciding what you wish to do with your money is completely your decision and there is no right way to spend it other than how you wish to.
However, if you are looking to build wealth and that is one of the highest priority goals in your life then investing at least 50% of this increased income is a great way to go about it. The lifestyle that you were living without this extra income was being sufficiently met with your regular income. Now when you get an increase, then you have two choices. You can either spend it instantly for a lifestyle increase which in some cases might even be unsustainable. Or you could invest it to fast track yourself on your journey towards your financial goals.
This way you get an uplift in your lifestyle while also building assets that will in the long run help you sustain and even improve that lifestyle.
Let us suppose that you invest Rs. 20,000/- each month in a SIP. Let us see the difference that you can create just by increasing this amount by 10% each year.
Assuming that you get a return of 12% on your investment and invest Rs. 20,000/- per month for 30 years. Then your final portfolio would look something like this.
Now, assume that you get a return of 12% and invest Rs. 20,000/- each month for 30 years but also increase your invested amount by 10% each year. Then your portfolio will look something like this.
As you can see, just an increase of 10% can increase your final portfolio by more than 135%, i.e. from Rs 7.06 crore to Rs 16.67 crore.
There are three main components to increasing your final portfolio value. Principal amount, returns and time. The idea is to focus on maximizing each one of them as much as possible sustainably.