The onset of the new year prompts a sensible commitment to dedicating daily hours to enhance one’s understanding of personal finance. Our journey begins with an exploration of the rule of 72, paving the way for investors to delve into aligning their investment strategies with retirement planning. Recognizing that not everyone aspires to work indefinitely, financial advisors offer concise and effective tips to achieve financial independence and early retirement (FIRE).
Initiating retirement planning in advance via systematic investment plans (SIPs) in mutual funds is a potent approach to constructing a substantial fund by the time you approach retirement age. The enchantment of compounding can genuinely produce remarkable results over the long term. This is because, with SIPs, you consistently invest a predetermined amount, perhaps monthly. As time progresses, your investments not only benefit from market returns but also accrue returns on the reinvested earnings from preceding years. This cumulative effect is the driving force behind wealth accumulation through compounding.
Resorting to “555 formula” for early financial freedom
As an increasing number of individuals show eagerness to commence investments at an early stage in life, the desire for early retirement is unmistakable. A perpetual commitment to the routine 9-to-6 workday is not an aspiration for everyone, making the “555 formula” an appealing strategy for seeking an alternative path.
The “555 formula” demands a bold approach. Firstly, there’s a requirement to embark on the investment journey at an early stage in life. Additionally, one must be prepared to confront the inherent risks of the stock market since relying solely on government-sponsored schemes may not suffice to reach the desired financial objectives.
How does the “555 formula” work?
The essence of the “555 formula” lies in the readiness to commence investments at the age of 25, progressively increase contributions by 5 percent annually, and persistently invest for a span of 30 years until reaching the age of 55. Following this strategy could potentially result in accumulating a corpus exceeding ₹5 crores.
Let us elucidate the “555 formula” through an example. Imagine an investor, aged 25, initiates a monthly investment of ₹10,000 in a mutual fund with an approximate annual return rate of 12 per cent. Then, progressively increase the investments by 5 per cent annually for the subsequent 30 years until the investor reaches the age of 55.
Invested amount: ₹79,72,662
Estimated returns: ₹4,47,61,398
Total value of the returns: ₹5,27,34,060
Understanding FIRE for high yields
At the heart of FIRE lies the fundamental principle of living frugally, saving and investing aggressively, and establishing a substantial financial cushion that enables you to retire well before the traditional retirement age. Achieving this is within reach, granted you possess the readiness to adhere to some of its stringent principles.
Initially, advocates of FIRE commonly strive to save 50 per cent or more of their income, occasionally reaching up to 70 per cent. Achieving this necessitates a deliberate choice to prioritize necessities over desires and curtail unnecessary expenditures. Initiating investments at an early stage is paramount to harnessing the full potential of compound interest, enabling your money to multiply significantly over time. Engaging with the “555 formula” becomes impractical without commencing early-life investments.
While some may lament the challenge of accumulating investment funds in their early years, diversifying income through side hustles, rental properties, or dividend-paying stocks can enhance financial security and expedite the journey to FIRE.
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Published: 02 Jan 2024, 01:20 PM IST