Want to retire rich? Start investing early and be systematic

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Ensuring a comfortable post-retirement life is easier than most think. All it needs is some rules to live by. Here are 10 of them.

Almost all of us want to make enough in our careers to lead a comfortable life and then when we retire, to maintain a certain standard of life. In between this, there will be many milestone events in our lives such as buying a home, a car, children’s education and marriage that will require large expenditure and, therefore, careful planning of investments.

While these expenditures may seem daunting, it is possible to provide for them with some planning and disciplined investing. So, here are the 10 rules I would like to recommend to you if you want to meet all of your life’s major goals and at the same time retire rich enough to lead a comfortable post-retirement life.

Rule No. 1: Start investing early. Remember, this is the most important rule. Why? Because time is your best friend when it comes to accumulating wealth. Let me give you an example: If you started investing just 2000 rupees every month when you are 18 and it earns you an annual return of 12%, by the time you are 60, you would have made 2.48 crore rupees! However, if you wait until you are 30 to start your investment, under the same scenario, you will make just Rs 62 lakh. See, what a difference starting 10 years early can make?! That is the power of compounding.

Rule No. 2: Be disciplined about investing. Set up a systematic investment plan and ensure there’s auto debit from your salary account. That will ensure you first invest before spending. Most people do the exact opposite. They spend first and then invest what little is left of the salary. That approach is the biggest enemy of systematic investment.

Rule No. 3: Beware of credit, and more specifically the credit card. When you are out shopping, it’s easier to spend when you are not handing out cash. You don’t realise how big an amount Rs 10,000 is if you are paying by card. But if you had to hand a shopkeeper a wad of Rs 100 notes, you would realise it’s a lot of money and a big part of your salary! But that’s the not worst thing about credit cards. It’s the interest rate that really kills you; you think you are ok because you are making the minimum payment on time. But what about the balance? Interest rates of 30% or more can balloon your debt in no time! So, shun the temptation of credit. Else, pay your bills on time to avoid interest.

Rule No. 4: Keep track of your monthly income and expenditure. Boring as it sounds, keeping track of your expenses can be a life-saver. It will immediately alert you if you are exceeding your monthly budget. Also, when you start writing down all your expenses, you realise how much you are spending.

Rule No. 5: Get insured early, both for life and health. When you are young, death or ill-health is not something on your mind. You are right; It shouldn’t be. But don’t let that stop you from taking advantage of the low premium you have to pay when you get insured early on in your life. The same insurance amount will cost you much more when you are older. Also, keep in mind that ill-health or an accident can easily wipe out all your savings, leaving you financially vulnerable when you are old. So, get covered.Rule No. 6: Avoid unnecessary expenses. Let’s face it. It is indeed tempting to upgrade to the latest model of cell phone every six months, or buy a bigger and better car, or a bigger LED TV. But the reality is, these are luxuries; these are not necessities. These spends make someone else rich, and you poor. You should be spending your money on assets, not liabilities. Assets grow your wealth and liabilities diminish it.

Rule No. 7: Educate yourself on financial planning. You may be a young doctor, lawyer, photographer, IT professional, a government officer or artist. You could be anything. But you owe it to yourself to know the basics of how money works. You know why? Because all smart people work for money, but the smarter ones make money work for them. These are the people who bother to find out why investing is not the same as saving. You must know why gold is not the best investment (tip: it stays idle in your bank locker); why real estate beyond your first home is more pain than profit. Or why good quality equity is your best long-term bet.

Rule No. 8: Set aside an emergency fund. This should be worth six months of your current salary. Do not touch this money under any circumstance. Unless, of course, you are unfortunate enough to lose your job and don’t find another one quickly. I am suggesting six months because finding alternative job can take time.

Rule No. 9. Invest more and not spend more as your income increases. It’s a common mistake many people make. As the disposable income in their hands goes up, they start spending more. Instead, you should start investing more.

Rule No. 10: Finally, have realistic expectations of returns. Stock markets are full of stories of people who apparently got rich almost overnight. Be very suspicious of any such stock or any person promising you fabulous returns. More often than not, they are scams. When it comes to financial success, it’s the slow and steady that wins the race.