We already saw in the article here, how our financial super power (“Patience”) affects the investment. Now let us look at another big financial trick which if applied rightly along with “Patience”, would reap you great rewards. This trick is called “Step up investments”.
“Step-up investments” – what does this mean? Every year most employees get some sort of salary raises (or increments). What do we generally do with it? We generally step up our life style a bit more – afford a bigger car, a better bike, a better house on rent etc. But increment or step-up your investments for each of your goals, by the same amount is equally important.
Numerical example – You invest 50,000 INR a month (split into multiple goals) and you got a 10% increment at office! Ideal way to go about is, “step-up” your investments by the same 10% – 55,000 INR a month (split into multiple goals). Multiple things happen this way:
- You reach your goal faster -such that you can move on to investing for other lower priority goals
- You have a clear plan of beating inflation and other unknowns easily
- You incremented your lifestyle and investments at the same rate – which make it sustainable living 🙂
Now let us look at what happens to your investments when we invest 20,000 INR per month in our “SENSIBLE DEFAULT” mode of Index Mutual funds for a period of 25 years. (Return assumption of 10% per year is a very conservative assumption, which is what we have assumed below)
Now, every assumption above is followed, only difference is that we are doing a step-up of investments at 5% per year. (Meaning last year the per month was 20000, now we assume it to be 21000 per month.)
In scenario #1 (patient super power mode ON) portfolio value – 2.65C
In scenario #2 (patient super power mode + Trick of Set-Up added) portfolio value – 3.98C
To summarise, being patient and stepping-up the investments can generate 49% more corpus over the same time period. How cool is that 🙂
Finally, promise yourself to step-up your investments by the same percentage as your salary increment!
