Why You Should Increase SIP Amount With Increase in Your Salary

What is SIP?

A Systematic Investment Plan (SIP) is like putting a little money into a piggy bank regularly. But instead of a piggy bank, it goes into mutual funds and market-linked funds. You decide how much and how often you want to put money in, like every month or every three months. It is a smart way to save and invest regularly without needing a lot of money upfront.

Ways to Increase SIP Amount with Increase in Salary

A salary increase is a perfect opportunity to boost your SIP (Systematic Investment Plan) contributions and grow your wealth faster. Following are some ways to leverage your raise for bigger SIP investments:

1. Automate the Increase:

   Step-up SIP: Many market-linked fund platforms offer "Step-Up SIP" options. This allows you to automatically increase your SIP amount by a fixed percentage every year (e.g., 5% or 10%). This leverages the power of compounding and grows your investment significantly over time.

2. Fixed Amount Increase:

   Budget Review: You should review your budget after the raise in your salary. Look for areas where you can cut back on unnecessary expenses. Allocate this extra money towards increasing your SIP amount.

3. Percentage Increase:

   Target Increase: Decide on a specific percentage of your raise you want to dedicate to your SIP. This ensures a consistent increase in your investment and helps you reach your financial goals faster.

Why Should You Increase the SIP Amount with an Increase in Your Salary?

There are a couple of key reasons why increasing your SIP amount (Systematic Investment Plan) along with your salary hike is a smart financial move:

1. Builds Discipline:

   • Prioritize saving over spending to cultivate disciplined financial habits.

   • Increase SIP allocation proportionally with any rise in income to maintain consistency and avoid complacency.

2. Helps Beat Inflation:

   • Inflation erodes purchasing power, particularly in developing economies like India.

   • Annual SIP increases counteract inflation, aiding in goal attainment and safeguarding against rising expenses like education and healthcare.

3. Surplus Corpus:

   • Overcoming initial investment reluctance and sustaining long-term commitment yields surplus funds beyond target goals.

   • Managing surplus funds effectively is crucial for maximizing financial potential.

4. Power of Compounding:

   • Amplify compounding effects by increasing SIP contributions.

   • Earn returns not only on initial investments but also on accrued gains over time. 

5. Discipline and Habit Building:

   • Boosting SIP reinforces disciplined saving habits, preventing lifestyle inflation.

   • Prioritizes long-term financial stability over short-term comforts. 

6. Achieve Goals Faster:

   • Accelerate progress towards financial milestones such as retirement, education, or home ownership.

   • Bring dreams closer to reality by proactively increasing SIP contributions.

Illustration of Regular SIP and Increasing SIP 

Suppose an investor wants to invest in an investment fund through SIP with the following details: 

• Tenure = 5 years

• Estimated Annual Return = 12% p.a.

• Initial Investment of Both Regular SIP and Increasing SIP = ₹5000 per month

• Monthly Increase in Increasing SIP = ₹500 every month

Let us compare a regular SIP and an Increasing SIP:

RESULT: By the end of the 5-year tenure, the total value of the investment in the Increasing SIP would be higher due to the increased contributions over time.

Introduction to Step-Up SIP

A Step-up SIP, also known as a Top-up SIP, is a type of Systematic Investment Plan (SIP) that allows you to automatically increase your investment amount periodically. This is a great way to align your investments with your growing income.

For example, let us say you start a Step-up SIP of Rs. 5,000 per month with a 10% annual step-up. Let us see what your investment would look like:

• Year 1: Rs. 5,000 per month

• Year 2: Rs. 5,500 per month (5,000 + 10% of 5,000)

• Year 3: Rs. 6,050 per month (5,500 + 10% of 5,500)

Difference Between Regular SIP Vs Step-Up SIP

In Conclusion

Increasing your SIP (Systematic Investment Plan) amount along with increments in your salary is a prudent financial strategy. Aligning your SIP to your salary hike maximizes compounding benefits, guards against inflation, fosters discipline, and speeds up goal attainment. This proactive approach ensures that you capitalize on increased earning potential to build a stronger financial future.