Shall we start by focusing on something very simple? One financial concept which is so basic, hat people often fail to follow just because it is very simple to implement. So, basically, the answer to any financial problem is to increase the gap between your earning and spending capacity – though the tough part is developing the skills to ensure that you sail through with it.
We often see that people associate the effect of snowballing with debt. Therefore debt snowballing focuses on repaying small debts, ultimately translating into repayment of a large debt. You just need to focus on making small savings which will ultimately spiral into a large saving one day. So, the pace at which a person builds his wealth is dependent on his income levels and his level of discipline. Focus on leading a lifestyle that they can afford and save at least a quarter of their post-tax income for long-term growth rather than aiming to create substantial wealth.
Once your income levels start going up in percentage terms, your savings should grow at a rate higher than the growth in income. In this way, you will be able to capitalize on the power of compounding. Nationlearns, Free On Call Financial and Investment Assistance Portal explain you with an example below:
Gaurav started investing in Rs. 20,000 per year at the age of 19 and when he reaches 27, he stops investing and locks all his investments till retirement. So, the total investment Gaurav made is Rs 180,000 in 9 years and stays invested for 39 years.
Rose, however, doesn’t make any investment until he is 27. At 27 she starts investing Rs. 20,000 per year till the age of 58 and he invested a total sum of Rs 620,000 in 31 years.
How will their investments work when both of them are at 58, just assume the growth rate was 8 percent per annum.
Gaurav’s earnings after all the calculations will be Rs 29.31 lakhs while Rose’s earnings will be Rs 28.9 lakhs, here for A the growth of investment is 16 fold while for B is only 4.6 fold.
The earlier one can start on building the corpus, the better it would be. For each year if one person delays, the amount required to be invested every month to achieve the same target just keeps growing.
How to figure out your investment snowball amount?
If you start by breaking up your financial goals it will be very helpful. You can start by subtracting how much you have and how much you need – it will tell you the distance left to cover.
Depending upon your expenses, age and income, you can work out how long it would take with the kind of investible surplus you have to reach your target. It can provide you a reality check and four things would become clear.
If your asset mix in equity and debt are correct.
Whether the expectation of your future is realistic.
If you will have to increase your disposable income to achieve your goals.
Whether you have to reduce the target.
To build a wealth snowball – realign your priorities to achieve a positive cash flow, and then use that positive cash flow to build wealth most importantly. It is very simple.
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