Sunday, 29 March 2015

How Much Money Should I have Saved by Now ?

Ever wonder how much money you should have saved by now?  Or more specifically, what should your networth or total corpus be at this time?  I am sure as you are saving and investing for retirement or any other goals, you must be thinking, am I saving enough, and is my corpus growing at the right pace?  How am I doing compared to others?  If you have these questions, don't worry, you are not alone!  We all think about this every once in a while, I am sure.  

You must have heard about this book called "The Millionaire Next Door" that talks about, among other things, the concept of networth and provides a simple formula for how to calculate your expected networth over time.  Like most books, this one also is based in the US, for American readers, and hence the thought process caters mostly to their situations.  

However, the concept is definitely interesting, and something that I figured can be explored in the Indian context as well.  So here is my attempt to calculate the expected networth or corpus for the Indian context.  
Before we start, lets be clear about my definition of networth for this analysis.  Your current networth is the sum of all your assets minus all your liabilities.  To put it simply, add up all the assets or investments that you own like bank balance, FDs, bonds, stocks, MFs, gold, jewelry, real estate etc, and subtract from that any liabilities like loans, credit card debt etc.  The answer you come up with is your networth

For the purpose of this discussion, lets assume that you started working at the age of 25, and your starting take home income (which is basically your income after paying all taxes) is Rs 3 Lakhs per annum.  Now you will be saving a certain percentage of this income, for your investments, right?  Assume you are able to steadily save 20% of your take home income for investments. So basically over the years you are saving a fifth of your take home pay, and investing it in various avenues to grow your corpus.  Also your income or salary is also hopefully growing year on year.  For this discussion, lets assume your salary grows at 8% per annum.  This is a reasonable average salary growth rate,  though in some years you will get a bigger increment, while in some years, your increment may not be as much.  Finally your total corpus or investments are also growing over the years, and we will assume they are growing at 12% per year.  I believe in todays Indian context, a 12% per year return rate on your investments is reasonable to expect, and a good start point for this analysis.  With this information, it should now be possible, with some simple maths to calculate your expected networth every year till you retire.  

I will assume a time period from 25 years of age when you start working to finally 60 years of age, when you retire; a period of 35 years, with the above assumptions.  Below is the table for your expected networth per year from 25 years to 60 years:
The first column is simply your age, and the second column is your annual take home salary that starts at Rs 3 Lakhs per year, and grows annually at 8% as per our assumption.  The third column is your savings which is 20% of your annual take home.  Finally the fourth column is your net worth that is growing at 12% per year, and is helped every year, by the annual savings that you add into your investment pool.  I have highlighted your corpus every 5 years so you can see how it grows. (I must mention here that all the figures in the table are in Lakhs)  

This table shows that by the time you are 45, you should have saved up approx Rs 1 Crore, in your networth!  Basically at age 45, your initial annual income of Rs 3 Lakhs, growing 8% per year, has now become Rs 14 lakhs per year.  Your saving in your 45th year at 20% will be Rs 2.8 lakhs.  This added into your corpus which has been growing at 12% per year for the last 20 years, will get you to Rs 96.2 lakhs, which is pretty close to Rs 1Crore!  If you are able to keep up this pace for another 15 years till age 60, you will retire comfortably with a final corpus of Rs 7.2 Crore, which should be sufficient to see you through your golden retirement years.  

How does your corpus compare to this example given above?  Do your own analysis using the method shown above to setup your roadmap for expected corpus.  I always find that if I have a target or goal in front of me, it is a lot easier to be focused and march towards that goal.  The expected corpus table above, is an example, for how you can go about setting up your own investment and networth goals.  Setup your networth goal as shown here for your own particular situation, use conservative estimates for salary growth, and investment growth, use an aggressive target for annual savings rate, and then see how your networth will grow in leaps and bounds.  

Happy saving, investing, and hopefully early retiring!

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