As kids all of us were told the story of the rabbit and the hare. While I don’t intend to tell the story here, the implication of the story are more important to investing than all the “gyaan” and financial numbo jumbo needed for becoming wealthier.
The basic premise of the story is that consistency even if you take very small steps is more critical than large irregular bursts.
The hare takes short bursts and then stops to rest while the rabbit keeps nudging small steps on a continuous basis.
For compounding to work, it is the consistency which is critical. That is why a systematic investment on a regular – weekly/monthly basis is more critical than investing a large sum at irregular intervals. Over here I am assuming that you are not a person who already has a large amount of money. (If you already had a large amount of money you would not be reading my blog anyway.)
There are 2 psychological issues which you need to keep in mind.
When small amounts of money keep getting deducted from your account on a monthly basis, it does not hurt and your spending patterns adjust with the little less money that you have in your account. But because compounding has less to do with the amount and more to do with the tenure and rate of interest, it works perfectly – like the rabbit – in building your wealth.
However I often hear people tell me that they would invest the money that they get in their annual bonus or sales incentive. While its a very good idea to invest the money that you get as a bonus(and not spend it), generally humans discount the bonus that is expected. So by the time the bonus actually arrives, there is a new microwave to be bought or their is a holiday to be taken or there is a relative’s wedding for which new dresses have to be purchased or there is a medical emergency for which the amount needs to be spent and then you never end up doing the investment.
I was part of this story for most of my life till 2013. I always intended to put the next major increment or bonus for buying my own house or making investments. But it never happened. Life just passes by and some new emergency, urgent expense etc. kept propping up and I did not have any major assets.
By starting very small investments on a regular basis from 2013 I was able to build consistency in my investment plan. The ups and downs of the market don’t bother me because I am getting to do averaging of my costs of the investments. Due to this I am able to build a core to help me work on ticking out items from my bucket list.
Whether you do any other new year resolution in 2020, take one step to carve out 3% of your monthly income and make automatic deductions for some investments. Slowly as you grow used to having 3% less income, raise the amount to 5% of your income and then to 10%. Check out your bank if they have any mechanisms to make this kind of deduction for investments. Today is just the 8th day of 2020….take action for a better, wealthier life.