To plan for your retirement, you need to commit to building wealth for your retirement. And if you are mindful and deliberate about saving, investing and spending money, you may be able to build wealth for your retirement faster than you think. Here are the ways by which you could create a retirement wealth faster than you realise.
Max out your retirement saving every year
Employee provident fund (EPF) and public provident fund (PPF) are your greatest allies in setting yourself up for a comfortable retirement. If you can afford to put full Rs. 1,50,000 in your PPF; and a 12% (along with 12% from your employer) of the basic salary – or you are moving closer to that limit, you are accomplishing a few things.
First, you are multiplying your earning potential in the market; and secondly, you shelter a sizeable chunk of your income from income taxes.
You are thoughtful, but not obsessive, about your investment choices
You have made thoughtful choices about where to invest the money you save to make sure it matches your own time horizon and risk tolerance. You are in a good shape as long as you choose your investments that diversify your portfolio – i.e. a mix of stocks and bonds – and do not levy too many fees. Check on your asset allocation periodically to ensure it matches your overall risk tolerance will be a smart move. However, obsessing over the details could easily lead to emotion fueled mistakes. Studies suggest, about 70% of the portfolio returns is the result of portfolio asset allocation.
You are focused on the big wins
Spending less than you make is the golden rule – but it is not the only rule. Yes, it is important to cut your spending ‘mercilessly’ on things that do not add value to your life, but a Rs. 100 here or a Rs. 500 there will not be a deciding factor.
There are few big wins in life where – if you simply get them right – you almost never have to worry about the small things. If you focus on 5-10 big wins rather than 100 little things, you will have a considerable amount of edge. For example – quickly paying personal debts, building a habit of automatically saving, negotiating a higher salary and investing early will have a much greater impact (and in a shorter time frame), than forging your weekend spends.
You don’t keep too much idle cash
If you understand the power of compounding interest – you will never keep more than you need in cash or sitting in your savings account. The best way to multiply your money is to invest in the market, but that is not the only option. You can still grow your idle money you need in the short term storing it in fixed deposits. Any savings account with an interest above 3.5% is worth considering. At the very least your money will lose less value to inflation. At best, you will boost your savings by a few thousands, with zero efforts required.
Your income is higher than last year, but your spending has not changed
If you are bringing home money than you did last year – great! That is a huge sign of progress particularly if you have not increased your spending along with it. Remember, going down the current standard of living if normally more difficult than increasing the standards.
Whether you scored a raise, landed a better paying job or created additional source of income, increasing your earnings is a form of leverage that can never be exhausted.
You have no high interest debts
Consumer debt is significant wealth killer. The markets returns on an average will be around 13-14% each year, while the average credit card charges an annual uncompounded interest rate of 24%. Carrying a balance at that rate would mean you have to invest twice as much money just to break even. The bottom line – it is not worth it. When you avoid high interest debt, you can optimize every rupee you have with you.
Have a finance goal and a plan to achieve them
There is no problem with aiming high. But if you have a roadmap in getting there, and you actually put it to action – your chances of achieving your goals increase greatly.
You do not have to seek professional help to manage your money or coming up with a plan, but it could be worth it if you are feeling struck. Set specific goals – and have a plan in place to navigate though economic ups and downs.