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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Increasing SIP contribution

Posted by Muthu on November 23, 2014

I see two sets of people. The first one increases their SIP contribution regularly as their income increases.

The rest keeps the SIP amount constant even after 5 years of starting the SIPs.

Over a period, both our income and expenses keep increasing. Proportionately our savings and investing also needs to increase.

As we repeatedly point out, you should save at least 25% to 30% of your income. The ratio needs to be higher if you want to achieve early financial independence in life.

Once in 2 years, aim to increase the SIP amount by 20%. If you start with Rs.50,000 SIP per month for 20 years; the SIP instalment needs to be as follows:

Year 1- 50,000

Year 3- 60,000

Year 5- 72,000

Year 7- 86,400

Year 9- 1,03,680

Year 11- 1,24,416

Year 13- 1,49,300

Year 15- 1,79,160

Year 17- 2,14,992

Year 19- 2,57,990

Assuming an annualised return of 18%, a fixed amount of Rs.50,000 invested every month over a 20 year period becomes Rs.11.72 crores.

If you start with Rs.50,000 and keep increasing the contribution by 20% every 2 years, again assuming an annualised return of 18%, you end up with Rs.18.64 crores.

By increasing your contribution by 20% every 2 years (or roughly 10% every year), your final corpus increases by 159%

To repeat; 10% yearly increase of SIP contribution would increase your final corpus by 159%

My question again:

Your income increases regularly!

Your expense increases regularly!

Why not your savings and investing?

Note: I could have also assumed 10% increase every year instead of 20% every 2 years. What I’ve given is only an illustration. We can play around with numbers like 10% every year, 30% every 3 years etc. Closer the frequency better would be the compounding.

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