Art of Getting Rich on a Small Salary
You can save and invest even on a small salary
Many people believe that getting rich by saving and investing is only for people with a high income. However, this is untrue. It all depends on your saving habits. Getting rich depends less on your income and more on how much you save and invest from your income. In this article, we will discuss how to get rich on a small salary.
Follow budgeting to start saving
If you want to get rich on a small salary, you need to save a specific portion of your income and then invest that money. To save money, you need to follow a budgeting system. You can start with the 50/30/20 budgeting system. As per this system, you should allocate:
50% of your monthly income to needs: These are essential expenses and are non-negotiable. Some of these expenses include groceries and daily use household products, EMI payments, taxes, rent, utility bills, etc.
30% of your income to wants: These are desirable but discretionary expenses. Some of these expenses include eating out or ordering food, vacations, movies, shopping, etc.
20% of your monthly income for savings and investments: These include:
- - Building and maintaining an emergency fund,
- - Term life insurance for the family bread earners
- - Health insurance for all family members
- - Investing for financial goals
With the 50/30/20 budgeting system, you should aim at saving at least 20% of your monthly income. If you cannot save the target amount, you should try and cut down on discretionary expenses from the 30% wants category.
If you can save 20% of your income comfortably, you should increase your savings further and start investing these savings towards your financial goals.
Start investing early to benefit from the magic of compounding
In the above section, we saw how you could use budgeting to save a specific amount every month. Now, we will see how you can invest these savings for the long term and benefit from the magic of compounding. You must be wondering how you can get rich by investing small savings. Let us understand with the help of an example.
Jayesh is a 25-year-old individual who has just started working. Let us see how Jayesh can get rich on a small salary. Jayesh is investing in equity mutual funds till retirement. He is expecting a 12% compounded annual growth rate CAGR) on his investments. If Jayesh invests small amounts of anywhere between Rs. 1,000-5,000 per month through a systematic investment plan (SIP); this is how his investments will grow.
Table: Growth in small investments in the long-run
|Monthly investment (Rs.)||Annual investment (Rs.)||Investment time horizon||Expected CAGR||Expected amount (Rs.)|
As can be seen from the above table, even a small monthly investment of Rs. 2,000 can make Jayesh a crorepati by retirement. If he invests Rs. 5,000 a month till his retirement, he will have a retirement corpus of more than Rs. 2.5 crores.
Image : Growth in small investments in 35 years with an expected return of 12% CAGR
Similarly, you can also get rich on a small salary by investing small amounts every month till retirement. If you increase your annual investment by 5-15% every year, as your annual income increases, then you will have a substantially higher amount by retirement. The magic of compounding will benefit you in the long run.
Image : Growth in small investments in 35 years | Magic of Compounding
As can be seen from the above chart, Jayesh starts with Rs. 3,000/month (Rs. 36,000/year). He increases his annual investment by 10% every year as his income increases. If his investments grow at 12% CAGR, he will accumulate Rs. 3.07 crores in 35 years (by retirement). The amount of Rs. 3.07 crores is almost double of Rs. 1.55 crores that Jayesh will accumulate if he invests a fixed amount of Rs. 3,000/month (Rs. 36,000/year). Thus, an increase in annual investment by 10% can result in a substantially higher corpus on retirement.
How to increase savings to invest more
You can increase your monthly investments by either cutting your expenses or increasing your income, or both. Let us see how you can do both of these. Rather than cutting costs, you can save more money by availing discounts and cashback on all your regular expenses.
When you use your credit card for any purchases, you earn regular reward points, spend-based offers, milestone offers, annual fee waivers, and other benefits. These are additional benefits over and above the discount offers.
You can save anywhere between Rs. 500-5,000 per month by using a combination of all the above offers. You can use these extra savings for your mutual fund investments.
How to increase your earnings to invest more
In the above section, we have discussed how to save money from regular expenses so that you can invest more. Now, let us discuss how you can increase your earnings to make additional investments. Once you spend a couple of years in a job profile, you specialize in that role. You can then tap into other income opportunities to make the best of your specialization.
Suppose you are working in a financial services company like a bank, insurance company, mutual fund, broker, etc., you will have in-depth knowledge of personal finance products and services. You can then use this knowledge to earn extra income with freelance activities.
In this manner, you can either cut your expenses or increase your income or do both and use the extra money to boost your investments.
Fund purchases through own money rather than loans
Whenever you want to buy a consumer durable or the latest gadget or fund a vacation, do it with your own money. Avoid purchases through high-cost loans like credit cards or personal loans. Instead, create a new financial goal on the Glide Invest App and start a systematic investment plan (SIP) in a debt mutual fund. Once you accumulate the money, go ahead with the purchase or funding of the vacation. Then, you can avoid paying high interest on loans and continue with your investments.
Set SMART financial goals
If you want to get rich on a small salary, then you should set SMART financial goals. SMART means:
S (Specific): You should be clear on what you want to achieve
M (Measurable): How will you know when you have accomplished the goal
A (Achievable): What are the steps that you will take to achieve the goal
R (Realistic): Will you be able to accomplish the goal if you take the steps that you have decided
T (Timely): By when will you be able to achieve the goal
A SMART goal can be: “I want to get rich on a small salary by saving 20% of my monthly income using the 50/30/20 budgeting system. Then, I will invest the savings over the next 35 years with an expected return of 12% CAGR to accumulate Rs. 1 crore by retirement.”
Accomplish SMART financial goals with the Glide Invest App
For accomplishing your SMART financial goals, you can partner with the Glide Invest App. You can start your financial planning journey and systematically invest towards your financial goals with the Glide Invest App. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved.