According to the 2016 world bank statistics, Rs 9,000 is roughly how much an average Indian earns in a month.
Assuming they are able to live frugally and save 30% of their income in a bank FD @ 6% interest and no taxes, they will be able to save 1 crore in 33 years.
Not too bad, right?
But there’s a catch.
1 rupee today, is worth much less in the future due to inflation.
Ignore the “Become a crorepati” ads by investment firms and insurance companies. They are designed to play on your emotions; not to educate you.
Sure, you might get 1 crore after 50 years if you invest in their scheme. But if all you can buy with 1 crore is an Apple iPhone after 50 years, that’s not much.
The math behind becoming a real crorepati
Let’s apply the present value calculation, adjusted for inflation, to the above numbers.
To save an equivalent of 1 crore, an average Indian needs to save for 103 years!
I am not sure about you, but I am pretty sure I will not live that long.
How do you increase your chances of becoming a crorepati?
There’s no rocket science here.
You need to do three things to become a crorepati:
- Earn more
- Save more
- Get higher returns for your investment
How can I earn more money?
Earning more money has the biggest impact on your ability to reach your goal.
Using the math earlier, if you earn 5 Lakhs a year, and everything else remains the same:
You can reach an equivalent of 1 crore in 64 years.
Even though most people cannot work for 64 years, it’s definitely better than 103 years!
The more you earn, the faster you can reach the 1 crore milestone.
To earn more money, here are a few things you can do:
- Ask for a raise
- Start a side business
- Learn a new skill or get a better degree and change career track
- Move to a better paying job
How can I save more?
In the previous 5 lakhs income example, instead of saving 30%, if you save 40%:
You can reach 1 crore in 49 years instead of 64.
It does not matter if you earn 10,000 a month or 10 lakhs a month if you spend all the money you earn consistently.
You’ll be living pay cheque to pay cheque and will never become a crorepati.
While you increase your income, it’s equally important to increase how much you save too.
To save more, here are a few things you can do:
- Save first and spend the remaining
- Unless you absolutely need one, never buy things on EMI even if the EMI is affordable
- Apply the 4-question-rule before you buy anything
Don’t go extreme and cut out all costly experiences. It’s OK to take your spouse out for a fancy candlelight dinner once or twice a year. Experiences are what stays with us. Not money.
How can I get higher returns on my investments?
In our 5 lakhs income example, let’s go back to 30% savings. But this time, let’s assume our investments earn a 10% returns every year.
You can reach your target goal of Rs 1 crore (adjusted for present value) in 35 years.
Even a 1% increase in your investment returns can significantly shorten the number of years it takes to reach your goal.
To earn more returns, here are a few things you can do:
- Invest in equity mutual funds
- Invest in stocks
- Invest in corporate FDs
Investments come with risk. Don’t ignore your ability to take risks and your asset allocation while investing in riskier assets.
Technically, you can lose 100% of your investments if invested in the equity markets. However, that’s very unlikely. Even in the worst 2008 crisis, most people did not lose more than 50 to 60% of their investment value.
The power of 3
Now let’s combine all the 3 scenarios above. You:
- earn 5 lakhs
- save 40%
- invest in equity mutual funds which gives you an average 10% return.
You can become a crorepati in 29 years!
The real meaning of being a crorepati
When people often say “I want to become a crorepati”, what they really mean is “I want to spend 1 crore rupees”. Those are two different things.
If by working all your life you save 1 crore, you cannot spend it recklessly. Your investments should be able to fund your expenses during retirement and other goals like children’s education, marriage, etc.
Be money wise and become a crorepati.
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