Most employees look forward to that all important text message on the last day of the month informing that their bank accounts are credit with salary. Most people treat their salary income as a ticket to spending and meeting their regular EMIs. But did you ever realize that the salary credit also puts a certain degree of responsibility on you? The bigger question is whether you are making good use of it and are you really making money work hard enough for you. You will be surprised to realize that even your monthly salary can actually be converted into a wealth generating machine and this is how you can go about it. Let us focus on how to make the most of your salary income and how to invest salary wisely. You can opt for any of the salary investments plans offered as SIPs but we will look at more of that later.
First stretch your savings, and then plan your investments
How do you define savings? More often it is the surplus that is left after your regular requirements like home expenses, entertainment, EMIs etc are met. That will never leave you with much because you have made savings a residual item. It should be the other way round. If your monthly income is Rs.75,000 and you are currently saving Rs.10,000 per month, then the question is can you stretch it to Rs.20,000? That means you may have to shift to a smaller apartment or reduce the number of times you eat out or even opt to travel by the more efficient metro rather than driving to office. Quite often, you will be pretty surprised that such small measures can go a long way in enhancing your savings by a huge margin. And once you have stretched you savings to the hilt, then you will surprised by the difference it makes to your investment capacity and the final wealth creation.
An SIP approach can work better if you are salaried
One of the big advantages of an SIP is that you can actually synchronize your outflows with your inflows. For example, if you are getting your salary on 30th of each month, then you can keep 5th of the next month as your regular SIP date. If your target is that you can save Rs.10,000 per month, just see if you can squeeze your budget further. This is why squeezing your budget matters.
ParticularsSave Rs.10,000Save Rs.12,000Save Rs.14,000Save Rs.16,000Invested inEquity FundsEquity FundsEquity FundsEquity FundsCAGR Yield (%)15%15%15%15%SIP Tenure25 years25 years25 years25 yearsTotal OutlayRs.30 lakhsRs.36 lakhsRs.42 lakhsRs.48 lakhsFinal CorpusRs.328.41 lakhsRs.394.09 lakhsRs.459.77 lakhsRs.525.45 lakhs
In the above illustration, when you stretch your monthly savings from Rs.10,000 to Rs.12,000, you an additional Rs.6 lakhs over 25 years. But, this creates wealth to the tune of 10 times this additional investment. And with every increase in the monthly contribution, the wealth accretion happens at a higher rate. That is why, the more you squeeze out of your monthly income, the more your salary works like a wealth creating machine.
If you are wonder about SIPs, they can actually work wonders
The key is to stay invested in equity funds over the long term. That is what generates wealth for you. Say, your monthly outlay is Rs.10,000 in a SIP. Which asset should you choose? Interestingly, SIP helps you to create a huge corpus of wealth over a long period of time but that is only possible if you are invested in equity (as you will see in the table below). The key to creating wealth through SIPs is discipline and consistency. Don’t start and stop SIPs on fits of emotion. Continue your SIP, irrespective of nature and volatility of the markets.
ParticularsBank SBBank FDDebt FundsBalanced FundsEquity FundsMonthly SIPRs.10,000Rs.10,000Rs.10,000Rs.10,000Rs.10,000Tenure25 years25 years25 years25 years25 yearsAnnual Returns in CAGR (%)4.00%6.75%8.75%12.25%14.50%Total Outlay in 25 yearsRs.30,00,000Rs.30,00,000Rs.30,00,000Rs.30,00,000Rs.30,00,000Actual Wealth CreatedRs.51.58 lakhRs.78.32 lakhRs.108.34 lakhRs.198.43 lakhRs.299.17 lakhWealth Ratio1.72 times2.61 times3.61 times6.61 times10 times
When you invest at a marginally higher rate over a longer time frame, then the final impact on the wealth creation can be humongous. If you really want to convert your salary into a wealth creating machine then you need to be invested in equities and you need to be in it for the long term? Above all, focus on your discipline in investing, more than anything else. Long term investors have consistently proved that equities not only create wealth but they do so with much lower risk over the long term. In the short term the equities may be a slotting machine but in the long run they are surely a weighing machine. If you add discipline and consistency to that, then you are all set to convert your salary into a wealth creating machine.
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