Power of Habits

Journey, no matter how long or short, always starts with the first step.
As we enter the new year, the first day of the year also happens to be a Monday. If we want to start something new, what better day to start the life you want to live!

While the first step is the most daunting one for most of us, do you know what is harder? Sticking to the plan. Healthy habits can help you do that. According to James Clear, the author of the book, ‘Atomic Habits’, it is not the huge effort that you put at the end that matters but rather the small efforts that you do regularly that make all the difference. Small habits are very powerful as they can create a transformation in your life by creating synergies and developing focus.

How to stick to healthy habits?
According to James Clear, habits are made up of cues, craving, response, and rewards. To start a new habit, we need to tweak the process.

1.) Cue – Make it obvious: If you want to start a new habit, make it easy for you to carry out the “action” at decision point. For example, if you plan to start running, keep your running shoes near your bed at night. So, when you wake up in the morning, your sports shoes are the first thing you will see, nudging you to run!

2.) Craving – Make it attractive: Link the habit you are trying to build to an action you love doing. Make the process enjoyable. Going back to previous example, if you like listening to music, carry your headphones and listen to music while you run.

3.) Response – Make it easy: Make the new habit easy to follow like keeping a target of running for 15 minutes.

4.) Rewarding – Make it Satisfying: Reward yourself for keeping up with the habit.
This is true for financial and money matters too!

Life you want to live can also be – retiring early or retiring with comfortable money. The first step towards your retirement planning is knowing first your current expenses, second knowing when you want to retire and third knowing how much corpus you will need when you retire.

Assuming an inflation rate of 6%, if a 30-year-old wants to retire at the age 58, with current monthly expenses of Rs 50,000/- the person will need Rs 5.21 crores corpus at retirement.

The amount may look huge now, but habits can help you save for your retirement. Best financial habit that can help you achieve your goal – Systematic Investment plan or SIP.

How can SIP help you achieve your goals?

Systematic Investment Plan helps you invest a small amount regularly into the mutual fund scheme of your choice. SIPs help you stick to your healthy investment habit by creating a hassle free, automatic process. The small amount is not heavy on your pocket is gives you ease and confidence.

Looking at the earlier example, to reach a retirement corpus of Rs 5.21 crores a person must invest, Rs 21,723 per month for 28 years assuming an XIRR of 12.93%). Thus, breaking down the task of building a huge corpus, into a small manageable step.

SIPs create a healthy investment habit. Here’s how:
1.) Cue – Make it obvious: Investing is automatic. Setting up an SIP trigger date near to your salary day, helps you invest without the fear of spending the excess money.

2.) Craving – Make it attractive: Checking at the amount getting accumulate each month and knowing that you are the one who is making this possible, is attractive in itself!

3.) Response – Make it easy: Having a deterrent like a lock-in period can help you stick to your plan longer.

4.) Rewarding – Make it Satisfying: Proof of pudding is in eating. A comfortable retirement is the reward you’re looking for.

Happy new Year and Happy Investing!

The author is CEO Baroda BNP Paribas Asset Management. Views are personal. 
Source: Niftyindices.com and Internal Research.
The rates for the retirement corpus illustration are in line with AMFI guidelines on ‘Usage of Illustration’. The inflation rate is assumed to be 6%. The monthly expenses are assumed to be Rs 50,000/- which will grow at inflation rate till retirement. That will be the monthl0y expenses at retirement. We have calculated the corpus required at retirement at taking the present value of inflation adjusted expenses for the remaining life (80 years). Real rate is considered here assuming that the post-retirement investment will be predominantly investing in debt securities / instruments (Assuming 25% Equity and 75% Debt) and hence the rate is 8.63% with inflation of 6%. So, the real rate comes to 2.48%. To calculate the SIP amount for reaching the retirement corpus we have considered Mean of 10 years rolling return between 01/06/13 and 30/05/23 of Nifty 50 i.e., 12.93%.