If you self-reflect on your annual expenses of the past 3 years, I am sure you would observe that your lifestyle has evolved. Your income has risen and so have your aspirations. It could be an upgrade to a better car, a better house, frequent shopping, frequent vacation incl. foreign travel, club memberships, lavish spending on special occasions & festive seasons, extra dining out, etc.
But with your income & lifestyle upgrade, has there been a proportionate rise in your SIP investment? Or has it remained a constant amount in the last 3 years?
It is imperative to increase your SIPs to keep pace with your spending & inflation.
This can be done through a step-up SIP, also known as Top-up SIP. It is a feature that allows you to automatically increase your SIP amount at regular intervals, annually or semi-annually, by a fixed amount or percentage.
Suppose you have initiated a Rs.10,000 monthly SIP for 15 years, growing at a compounded average return of 10 per cent p.a. If you kept the SIP constant, you would accumulate Rs.40 lakhs at the end of 15 years. But if you topped up your SIP every year by 10 per cent, your corpus would grow to Rs.72 lakhs.
Through Step-up Sips, you can thus effectively harness the power of compounding over the long term.
Step-up SIPs help to achieve long term goals which may initially appear beyond your reach. They allow you to start small and then eventually bridge the gap as your income & savings rise.
Further, if you are committing more savings through SIPs than required, it can help you to fastrack your financial goals by a few years.
Should you automate your top-up SIP?
This would depend upon your financial situation and responsibilities you handle. If you are someone in your early working years where you have nil or less financial responsibilities and more propensity to save, topping up your SIPs by a fixed percentage or amount is more suitable. For someone who is juggling EMIs and other financial obligations and does not have a clear idea of their cash flows, a careful review of savings and budgeting can be done to decide and manually set up the incremental SIP every year. The good part about automation though is that the money gets debited from your account and invested before you spend it.
Any incremental cash flow can be channelized into increasing your SIP every year. For example,
- Increase in salary
- Earning rental income
- Earning income from side hustle
- Any small tax savings due to Union budget proposal
- Closed loans and turn debt free.
- Spouse resuming work again after sabbatical.
To conclude, by adopting a top-up SIP strategy, you can inculcate the discipline to put your incremental income to work every year. So, do not forget to upgrade your investment along with your lifestyle.