Goal-Based Investing: Calculate SIP Amount For Your Financial Goals

Deciding the SIP amount should be as easy as choosing pizza toppings. And guess what? It is!

Creating an SIP is the easiest, safest, and consistent way of building wealth. You can set it up within a few seconds.

However, the primary hurdle is to figure out what should be the amount.

No single rule fits all. True. But there is one rule that can fit everyone. And we are going to discuss that in detail.?

Systematic Investment Plan for a Specific Financial Goal

Let’s say you have a bunch of ingredients in front of you. What would you do? You’ll first figure out what dish can be made out of it and use the ingredients accordingly. Easy.?

Similarly, you have to first set a goal and then fetch the SIP amount from your monthly salary.?

Sometimes, a straightforward way is the reverse way. Define the goal first and work backwards.

It gets easier than this. Let’s figure out your SIP amount with simple calculations.

For the sake of example, we will consider a downpayment for your home as a financial goal.

Goal-Oriented SIP Amount

Let’s say you are planning to buy a house of 2cr value in 10 years. You may want to generate 20% i.e. 40L of downpayment.

Your goal is to build 40L within 10 years.?

Mutual funds are capable of delivering superior returns over a 10-year horizon. Assuming 12% expected annual returns, your SIP amount would come out to be 17220/month.

Use the SIP calculator to do the math. The above example will change as per your goals.

The best thing about this rule is, it fits everyone and everything. Say you want to buy a car. What kind of car are you buying? What would be the expected downpayment? Use these numbers to generate the SIP amount.

The right amount for SIP can cater to:

• Building an emergency fund
• Preparing children's education fund
• Planning for retirement?
• Planning larger expenses
• And building wealth for a comfortable lifestyle.?

Investment Horizon and Step-UP Systematic Investment Plan

Let’s say you only have 12,000 to invest instead of 17220/month (as per previous calculations).?

In such a case, you have two options to restructure your goal.

1. Adjust the Horizon

After your regular expenses, you might be left with only 12,000 for SIP. In that case, generating 40L will take between 12-13 years instead of 10 years.

You can adjust the amount and horizon that is comfortable for you.

2. Step-UP SIP

You can easily add a step-up to your existing SIP to achieve your goal faster. It is a method to increase the SIP amount by a certain percentage.

So that, when your salary increases, you can comfortably increment the SIP amount as well.?

You don’t have to create a separate SIP and you can automate the increment.

In the previous SIP of 12000/month, if you add a 10% annual increment, your 40L goal will be achieved within 10 years.?

These two methods can help you achieve your goals in the desired timeframe.

How to Ensure SIP Amount?

Now you have done the math. Seen the numbers. You have a clear path ahead.

But what if, you don’t have enough to invest??

Investors often struggle to plan investments due to regular expenses and lack of planning. Living paycheck to paycheck will leave you with very little to invest.

If you want to ensure disciplined investments to achieve your goals, here’s what you should do:

1. Save at least 30% of your salary

Plan your budget to save a decent amount of your salary. Saving 30% seems ideal; though the more the better.

Review your expenses and cut down unnecessary spending to save more.?

If you are a big spender, set your SIP date to the beginning of the month- right after you receive your salary. That way, you don’t have to worry about not having enough to invest by the end of the month.

Please note that the SIP date doesn’t affect your returns. Choose the date that is comfortable for you.

2. Diversify your portfolio

You can distribute your investment between equity and debt instruments (Read more about asset allocation). While equity funds can cater to your long-term goals, debt funds can fulfil your short-term goals.

It is important to determine the equity-to-debt ratio based on your risk appetite. Talk to your wealth manager to decide which funds to invest in. Start SIPs accordingly.?

Find more personal finance insights here.

Conclusion

There are plenty of opinions about the SIP amount. What works every time is having a goal to work towards.?

Now that you know how to decide the SIP amount, plan your investments wisely. Share this with all your fellow investors to make their life easier.

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