Why Should You Increase SIP Amount Every Year: A Guide
Investing through a Systematic Investment Plan (SIP) offers a flexible way to build your wealth over time. However, to truly maximise your returns and reach your financial goals faster, it is crucial to increase your SIP amount every year. This blog will help you understand why increasing your SIP annually can make a significant difference in achieving your financial aspirations.
Why Should You Increase Your SIP Every Year?
The following are some reasons why you should boost your SIP every year:
- Maximise Returns with Compounding
SIPs leverage the power of compound interest. Increasing your SIP contributions amplifies the effects of compounding. This way, you earn returns on both your initial investments, fresh investments, and the gains accumulated over time, maximising your overall growth. By increasing your SIP amount, you earn returns not just on your initial investment but also on the accumulated interest.
- Combat Inflation
Inflation reduces the purchasing power of your money over time. To offset this, you need to increase your investments. Traditional savings plans might not keep up with inflation. So boosting your SIP helps protect the real value of your savings and ensures your money retains its worth.
- Achieve Goals Sooner
Whether you are saving for a dream vacation, your child’s higher education, or a comfortable retirement, increasing your SIP helps you reach these goals faster. By raising your SIP contributions, you can accelerate progress towards reaching your financial targets through the benefits of compounding.
- Align with Income Growth
As your income grows over the years, you need to adjust your investments accordingly. Increasing your SIP in line with your rising income gives a boost to your finances, ensuring you stay on track with your savings goals.
- Build Financial Discipline
Regularly increasing your SIP helps instil a disciplined saving habit. It encourages you to prioritise saving over spending and maintain consistency in your investment approach. Committing to higher SIP contributions can lead to achieving a surplus beyond your initial goals. Effective management of this surplus can further enhance your financial potential and provide extra financial security.
How to Boost Your SIP?
The best time for stepping up your SIP every year is when you get a salary hike following your annual appraisal. It allows you to adjust your investment in line with your increased earnings and expense outlays without disrupting your current lifestyle. You can follow the following procedure to increase your SIP amount:
Step 1: Start Small and Increase Gradually
If you are new to SIPs, the idea of raising your investment amount each year might seem daunting. Begin with a manageable amount that fits your budget, and gradually increase it over time. This approach helps you adjust to higher contributions without feeling overwhelmed.
Step 2: Take Advantage of Market Fluctuations
Market ups and downs are a natural part of investing. Use these fluctuations to your benefit by increasing your SIP amount during market dips. Buying more units at lower prices can potentially enhance your returns when the market recovers.
Step 3: Monitor Your Finances
Regularly review your financial situation and adjust your SIP contributions as needed. If you receive a salary increase or pay off a debt, consider boosting your SIP amount to reflect your improved cash flow. Conversely, if you encounter financial difficulties, it is okay to temporarily reduce your SIP contributions until your situation improves.
Step 4: Use Online Calculators
Online calculators can help you figure out how much to increase your SIP amount each year. They consider factors like expected returns, inflation, and investment duration to provide a tailored estimate.
Let Us Understand This With an Example
Suppose you plan to invest in an investment fund with a tenure of 5 years and an estimated return of 12% per annum. You start with an initial investment of ₹5,000 per month and plan to increase your contribution by ₹500 every month.
|
Month |
Regular SIP |
Increasing SIP |
Estimated Returns (12% p.a.) |
Total Value - Regular SIP |
Total Value - Increasing SIP |
|
1 |
₹5,000 |
₹5,000 |
0 |
₹5,000 |
₹5,000 |
|
2 |
₹5,000 |
₹5,500 |
₹600 |
₹10,600 |
₹11,060 |
|
3 |
₹5,000 |
₹6,000 |
₹1,272 |
₹17,272 |
₹18,460 |
|
4 |
₹5,000 |
₹6,500 |
₹2,032 |
₹24,304 |
₹26,760 |
|
5 |
₹5,000 |
₹7,000 |
₹2,880 |
₹32,184 |
₹36,336 |
Over 5 years, the total value of your investment in the Increasing SIP option will be higher compared to the Regular SIP option. This is due to the progressive increase in your monthly contributions, which boosts the overall investment value as time goes on.
The Bottomline
Simply investing in an SIP will not guarantee that you achieve your financial goals. It is essential to choose a scheme that aligns with your financial objectives and convenience. To fully leverage the benefits of SIP, make sure to increase your SIP amount every year. This approach enhances the power of compounding and helps you stay on track to reach your goals more efficiently.