While becoming a crorepati may seem well out of reach for most people, you could certainly give it your best shot by chalking out a long-term plan and taking small steps over the course of time to achieve your goal.
The ideal time to start would, of course, be as soon as you start earning. Usually, cash flows happen through two main sources. One is through incentives for human skills such as salary, professional income and profit, while the second is through income from investments. This can include interest income, income from shares and rentals from real estate. Ideally, you should look at retiring when the second source of income is enough to replace the first.
Consider this: If you wish to retire today with a yearly income of Rs 10 lakhs, you will need productive assets worth at least Rs. 1 crore to generate that kind of income. However, if you think long-term, your income levels will increase and expenditure can be controlled, while your investments can be set up to ensure that you have a secondary source of income.
Based on your income and lifestyle, we suggest that you set the target. But, if you’re looking to hit the 1 crore mark, then this is where we come in. Here is how you can start saving to become a crorepati.
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The distance to your dream figure
You must be aware of your current net worth. If you aren’t then it’s time to work it out. Identify the difference between your net worth and Rs. 1 crore to find out how much you need to save up.
Now, take into account your age, family circumstances, income and expenses to come up with a timeframe within which you can reach your target. For example, if you are able to save Rs. 25,000 every month and you already have a net worth of Rs. 20 lakhs, you can reach the Rs. 1 crore figure by 2028. This is assuming that your investments earn an interest of 8% per annum.
Determining your current net worth will give you a clearer picture with regards to where you stand financially and what you need to achieve. It will also help you decide where to invest and whether you need to increase your savings.
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When you have a huge target to aim for, it would be wise to go about achieving it by setting smaller milestones and targets along the way. For example, you could strive to raise your net worth from Rs. 10 lakhs to Rs. 20 lakhs, rather than gunning for the big figure immediately.
You must also understand that if it is financially impossible for you to achieve a target of Rs. 1 crore with your current income, then it would be best to set yourself a lower target. If you are in the early phases of your career, you may not be able to make substantial investments, but time would certainly be on your side.
You should either have the income or the time to build your savings. Keep reviewing your progress as you go along. This could even mean changing and altering your investments from time to time. Take your salary increments, windfalls and lifestyle changes into account. Benchmarking will help you understand where you are and why you are there.
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Instead of calculating your expenses first and basing your savings on the same, flip it around. Start with your savings and then move on to your expenses. This will help you learn to live within a budget and is especially important if you are targeting a figure like Rs. 1 crore.
Ideally, you should target saving 25% of your post-tax income. Since both your income and expenses will keep rising over time, you should ensure that your savings also undergo similar growth. Every time you get a salary hike, think about increasing your savings proportionately.
When you start working, you should look at managing expenses tightly and increase savings at every turn. When you get married and raise a family, your responsibilities will continue to increase so reining in your expenses may become difficult. Therefore, it is ideal to do it when you can, as soon as you can. The key to achieving your goal early is a combination of early savings and a progressive increase in the rate of your savings.
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Manage your expenses well
The key factors that might contribute towards a rise in your expenses are inflation, lifestyle costs and more dependents. Apart from inflation (which can be taken at an average of 6%), you also need to consider a 2%-3% rise in expenses due to lifestyle costs.
Ideally, you should look at an expense increase of 8%-9% every year. If your income growth is lower than this, you might need to look at better growth opportunities, tweak your expenses or invest in avenues that give you higher returns.
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Early does it
The earlier you start saving, the less financial stress you will face as the years go by. Remember, compounding works best in the long-term. If you don’t save early, you might need to step up your savings in your later years, which could compromise several of your goals.
For every year you put off saving, the amount you need to invest every month will only become higher. If you delay too much, the target figure of Rs. 1 crore might become unattainable.
Consider this: If you start saving at the age of 25 instead of 30, the amount you can save for your retirement can be 18% higher assuming you retire at the age of 60. Similarly, if you were to save 30% of your income instead of 25%, you will have as much as 36% higher savings when you retire.
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Fix those liabilities
Never include liabilities as part of your expenses. You must categorise them well so that you can get rid of your liabilities as soon as possible. You also need to account for liabilities that might come up later and plan for them so that you minimise the loans that you might need.
Treat those possible liabilities as future markers and start saving for them. The amount invested to meet these future liabilities will need to remain untouched until you actually need the money. Getting a Home Loan and a Car Loan will add to your liabilities. Ensure that you close them early to save on interest. Making higher down-payments will help you seek lower loan amounts.
Insurance policies, particularly Life Insurance and Health Insurance, while essential, is also likely to take up a chunk of one’s monthly income in the form of premium payments. While aiming for future financial goals, it is important to get yourself adequately insured since this will help you keep your long-term savings protected in the event of any sudden emergencies.
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What to do with windfall gains
Any windfall gains like bonuses, incentives and gifts can significantly reduce the time needed to reach your target corpus of Rs. 1 crore. However, there is a natural tendency to use these windfalls for pleasure and other aspirations. While a little bit of indulgence is alright, if one plans carefully enough, one can enjoy the spoils of these windfalls by drawing up a robust investment plan with this extra amount. This would accelerate one’s objective towards meeting their financial goals.
It would also be prudent to save a decent chunk of any income gained through such windfalls. While the temptation to spend it may be great, a smart investor would use this to provide some flexibility in order to achieve his or her goal earlier than planned.
You could also use these windfalls to reduce your liabilities since doing so will ultimately help in increasing your net worth. Any windfall gain should be used to do away with any liability or high-interest loans. You can even think about paying off your Home Loan for example. You can start investing in a debt or equity fund to prepone your target achievement.
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These small steps will ensure that you reach your Rs. 1 crore target as early as possible. If you need help on which investments to go in for, read this – Best Investments For The Next 10 Years. And if you need financial help, you know who to go to.