Invest More Tomorrow SIP – a better SIP for you

Systematic Investment Plan (SIP) i.e investing a fixed amount every month is a good strategy for building long term wealth, and every investor should have it in their arsenal of investments. As we have mentioned before, anchoring reduces the benefits of a SIP. The most common pitfall is that people do not revisit their SIP amount periodically, even after their real income increases and they have more invest-able wealth.

A Rs 10,000 monthly SIP which was appropriate for you 5 years ago may not be the right investment amount for you now. Your SIP amount should go up by the rate of inflation every year so that you invest the same rupee purchasing power year after year: or your SIP amount should increase by ~5% every year. To be even more future safe, we recommend that your monthly SIP should go up by your nominal wage increase which has averaged ~10% in India in the past. Being anchored to a fixed SIP over a long period of time can have serious consequences on your final retirement corpus. By increasing the monthly SIP amount periodically an investor can ensure that they are investing the right amount for their future and do not have lazy cash lying around in their bank accounts.

We call a SIP that goes up by a fixed percentage amount every year an Invest More Tomorrow SIP – tailored after the successful Save More Tomorrow plan.

In the chart below we revisit Rani who has been investing Rs2,500 per month every year and has done very well for herself. What if she took our advice and increased her monthly SIP by

(i) her nominal wage growth (10%) or

(ii) the long term rate of inflation (5%)?

The difference, as shown in the chart below, is staggering. Over 25 years of investment, Rani would have 2.5x times the money if she increased her SIP amount by 10% every year. By using an Invest More Tomorrow SIP, Rani is ensuring that her investment amount is tracking her wage growth and she does not have ideal cash lying around in her bank account. Also, by deciding today on what she is going to do with the future pay increase she is ensuring that she will save and invest that amount and not spend it on some compulsive purchase.

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Economist Richard Thaler who successfully implement the Save More Tomorrow plan in the US had this to say about planning for the future and self-control today: “By inviting employees to join a few months before their raise, the plan takes advantage of the fact that for most of us, our self-control intentions about the future exceed our implementations in the present. For example, given the option of going on a diet three months from now, many people will agree. But tonight at dinner, that dessert looks pretty good.”

It’s all good in theory, but what does it mean in practice:

  1. A monthly SIP is an important part of every long term investors arsenal.
  2. An Invest More Tomorrow SIP is better than a simple SIP. An Invest More Tomorrow SIP increases the monthly SIP amount by 10% every year.
  3. Our self-control intentions about the future exceeds our implementations in the present and the Invest More Tomorrow SIP takes advantage of this.

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