An underappreciated way to save big money

In our quest for higher returns, we tend to miss out the simplest ways to save and create more wealth; which is discipline and planning.

May 05, 2019 03:05 IST India Infoline News Service

Amit and Samir started out their careers in the private banking industry at the same time. They both wanted to retire wealthy but their approaches were different. Amit started his SIP at 25 and decided to continue all the way to his retirement age of 60. Samir decided to start saving 20 years later but decided he would invest four times the money as Amit. Since Amit started at the age of 25, he could afford to take the risk of putting money in equities. Samir did not have the same risk appetite at 45, so he opted for bond funds. How would their retirement corpus look like?
Monthly SIP (Amit) Invested in Yield Corpus at 60 Wealth Ratio
Rs5,000 Multi Cap Equity Funds 15% Rs7.43 cr 35.38 times
Monthly SIP (Samir) Invested in Yield Corpus at 60 Wealth Ratio
Rs20,000 G-Sec Bond Fund 9% Rs76.25 lakhs 2.12 times
 
Amit actually saves just Rs21 lakhs over 35 years but ends up with a corpus of Rs7.43cr. However, Samir saves Rs.36 lakhs over 15 years but ends up with a much smaller corpus of Rs.76.25 lakhs only. What is it that Amit appreciated which Samir could not?
 
Have a time-bound Goal to target
 
The difference was that Amit had set clear cut goals. He knows that with just Rs5,000 per month he could create enough wealth through mutual funds by just staying invested. With a corpus of Rs7.43 crore, Amit would have been left with a decent surplus even after paying for all his long term goals. Samir, on the other hand, has taken a haphazard approach as he never bothered about specific goals to target.
 
Start early and continue longer
 
This is the one factor that distinguishes Amit from Samir. At the end of the day, it is not the amount you invest that matters but how long you invest that really matters. In the above case, Samir has actually invested a lot more than Amit but still ends up with a corpus that is just 1/10th of what Amit has generated. That is because Amit started much earlier. In the case of Amit the money could compound consistently for a period of 35 years whereas in the case of Samir, there was only 15 years for the money to compound.
 
Compounding is when the money starts working heard for you. That is evident by the wealth ratio. Samir has a wealth ratio of 2.12, which means money has hardly worked in his case. On the other hand, Amit has a wealth ratio of 35.38 times indicating how much harder money has worked. Starting early is often not appreciated as an important method of creating wealth.
 
Pick the right instruments
 
Since Amit began investing at 25, he had age and risk appetite on his side. When Samir started at 45, he was mid-way through his career and had fewer options in front of him. That is why he was forced to opt for debt funds as he did not have the risk capacity to taken on equities in his portfolio. That is where Amit gained an upper hand because equities naturally perform well in the long run and that worked in favour of Amit. The choice of assets worked in favour of Amit because he could afford to take on that additional risk. For Samir, the biggest risk was that he could not afford to take on risk!
 
Be disciplined; make it automatic
 
A lot of Amit’s efforts would have got dissipated had he tried too hard to time the market or catch the lows and highs of the market. Instead, Amit adopted a more passive approach to letting his money grow. Eventually, that turned out to be the difference.
 
In our quest for higher returns, we tend to miss out the simplest ways to save and create more wealth; which is discipline and planning. In a world of complex financial instruments and algorithm driven trading, the best saving and wealth mantra still remains fairly elementary. The message is to keep it simple!

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