Let me start by focusing on something very simple. A financial concept so basic, that people often fail to follow just because it is very simple to implement.
The answer to any financial problem is to increase the gap between your earning and spending capacity – though the tough part is developing the skills to ensure that you sail through with it.
People often associate the effect of snowballing with debt. Debt snowballing focuses on repaying small debts, ultimately translating into repayment of a large debt.
Building wealth moves pretty much on the same lines, you need to focus on making small savings which will ultimately spiral into a large saving one day.
The pace at which a person builds his wealth is dependent on his income levels and his level of discipline. Rather than aiming to create substantial wealth, focus on leading a lifestyle that they can afford and save at least a quarter of their post-tax income for long-term growth.
When your income levels start going up in percentage terms, your savings should grow at a rate higher than the growth in income. This way you will be able to capitalize on the power of compounding.
Let us look at this example:
A started investing Rs. 20,000 per year at the age of 19 and when he reaches 27, he stops investing and locks all his investments till retirement. The total investment A made is Rs 180,000 in 9 years and stays invested for 39 years.
B, however, doesn’t make any investment till he is 27. At 27, he starts investing Rs. 20,000 per year till the age of 58 and he invested a total sum of Rs 620,000 in 31 years.
So, how will their investments work when both of them are at 58, just assume the growth rate was 8 percent per annum.
A’s earnings after all the calculations will be Rs 29.31 lakhs while B’s earnings will be Rs 28.9 lakhs, here for A the growth of investment is 16 fold while for B is only 4.6 fold.
Ideally, the earlier one can start on building the corpus, the better it would be. For each year that you delay, the amount required to be invested every month to achieve the same target just keeps growing.
How do you figure out your investment snowball amount?
It will help if you start by breaking up your financial goals. Start by subtracting how much you have and how much you need – it will tell you the distance left to cover.
Depending upon your age, income, and expenses, you can work out how long it would take with the kind of investible surplus you have to reach your target. It will give you a reality check and four things would become clear.
> Whether the expectation of your future is realistic.
> Whether you have to reduce the target.
> If you will have to increase your disposable income to achieve your goals.
> If your asset mix in equity and debt are correct.
Most importantly to build a wealth snowball – realign your priorities to achieve a positive cash flow, and then use that positive cash flow to build wealth. It’s actually that simple!
(The author is Personal Wealth Advisory, Edelweiss)
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.