SIP for Rs 5,000 a month, retire as crorepati

Have you been waiting for the salary hike to kick start investments? Envying your cousin who booked a luxury car launched at the current Auto Expo or regretting that you haven't inherited enough to earn the millionaire plaque?

Stop sulking as there is an easy way to reach your crore. You are fretting as you have surely forgotten the lesson your grandma taught you – drop by drop fills the mighty ocean. Discipline and small contributions can help you build your million. And by small, here we mean just Rs 5,000 saved each month. Yes, just Rs 5,000 a month.

Don't agree? Well, we have proof to back that up.

Consider that you start investing Rs 5,000 when you are 25 years old. Over a period of 30 years, you would have reached far beyond the magic number of Rs 1 crore. Now, 30 years is the time needed to build Rs 1.13 crore if your investments earned an annual return of 10%.

If you garnered 15% on the investment of Rs 5,000 each month, then amount Rs 1 crore would be conquered within 22 years. However, if your investments grow at the compounded annual growth rate generated by the oldest mutual fund schemes of 21%, then you would be able to bucket your crore within 18 years.

But one cannot drive based on what the rear view mirror has unfolded so far as it isn't indicative of the bumps and turns that lay ahead. Same is the case with investment returns and one cannot fathom what lies ahead.
But it takes both rain and sunshine to make rainbows. Your diligent contributions and time, both go hand-in-hand to create the spectrum of wealth.

So, if Ram starts saving Rs 5,000 per month when he is 20-year old, he would have Rs 5.94 crore when he retires at the age of 60. But Shyam, who started accumulating Rs 5,000 each month after he turned 30 years, will be able to accumulate just Rs 1.76 crore, which is less than half of what Ram has gathered. This is even when both earn the same return of 12% every year.

Now, if Ghanshyam starts investing Rs 5,000 at the age of 35 years, then his investments would have grown to only Rs 1.33 crore, even if he managed to invest in schemes that generated 18% returns.

The message we want to drive down is that when you start saving at an early age, even a lower growth rate would catapult you to the crore-mark aided by the force of compounding. But as you delay savings, you would need the thrust of returns to reach the mark, as even double the savings wouldn't help if you miss on the ride of compounding.

Compounding snowballs your investment because the gains over years gets added, and earn additional returns over years. It is just like sharing a message on social media. You share it once, then your friend shares it, and later your and your friends' friends share. The total number of shares is much greater than your original friends who shared it.

While compounding propels your investments, inflation shrinks it. Hence, the Rs 1 crore you built over the period would be eroded by the time you achieve it. So, if we assume inflation at the rate of 6%, then Rs 1 crore would mean only Rs 31 lakh over the period of 20 years. If you take longer to accumulate, then it would be worth merely Rs 17 lakh at the end of 30 years.

It is essential that you consider inflation while saving for your goals. So, if you need Rs 50,000 for your monthly expenses today, the inflation demon would bulge that amount to Rs 3.84 lakh even if it rises at 6% each year.

There are various online calculators available that help you plan for retirement by factoring in inflation. Use them to find out the future value of the corpus you would need to build to meet your goals, and save accordingly.
However, don't procrastinate and wait for that salary hike to start bottling up your crore.

Names and situations are fictitious and bear no resemblance to anyone in real.