For most of us, saving Rs 1 crore seems unrealistic, but it’s possible with a little bit of luck and strict financial discipline. No, you don’t have to dabble in high-risk products like stocks or mutual funds to achieve the goal, which may seem to take a lifetime, but is doable — hold your breath — in 15 years!
The path to Rs 1 crore savings pool involves no rocket science but by simply treading the road often taken by the conservative class, which is to spend less and save more. The latter task includes a combination of low-risk, ‘safer’ products like fixed deposits, Public Provident Fund (PPF), National Savings Certificate or other small savings schemes and government bonds, which currently offer a fixed interest rate of 7.75 per cent.
To create an enviable corpus of Rs 1 crore, all it needs is savings of Rs 30,000 per month or Rs 3.5 lakh per year, steadily for a period of 15 years. But the catch here is that the conventional savings products mentioned above should hover around the prevailing interest rate of 7-7.8 per cent or above. In case the interest rates fall below 7 per cent, the amount of savings will have to be moderately tweaked.
Among all the available financial instruments, the ideal way to park most of the savings using a combination of PPF and other products. A significant chunk, or 86 per cent to be precise, should go into PPF for one simple reason: Interest income is tax-free unlike other products -- in addition to the income tax exemption of up to Rs 1.5 lakh under Section 80 (C) — that attract tax on interest earned. But a PPF account, too, has limitations with the maximum deposit capped at Rs 1.5 lakh per annum for an individual. To make the best of it, a couple can operate two PPF accounts setting aside Rs 3 lakh per year. PPF comes with a lock-in period of 15 years, and account holders are entitled to partial withdrawals from sixth year onwards. Provided you resist the urge to dip into this nest egg, in 15 years, it turns in a staggering Rs 86 lakh.
The remaining Rs 50,000 per year (of the Rs 3.5 lakh) can be parked in NSC, government bonds, Post Office term deposits, which have a relatively high interest rate (on five-year deposits) than traditional fixed deposits in commercial banks. One may have to bear in mind that products like NSC come with a lock-in period of five years, but the upshot is interest is calculated cumulatively fetching maximum return.
Alternative financial instruments like stocks yield better returns, but financial planners say efforts to create a huge corpus in 3-5 years (via investing in equities alone) is unrealistic and risky. Provided one fully understands the way market works and the risks attached, a combination of say PPF and mutual funds could reduce the time taken to save Rs 1 crore to less than 15 years or give more than the desired Rs 1 crore in the same duration.
How to become a crorepati in 15 years Save G30,000 per month or A3.5 lakh per year Invest 86% of the savings into PPF Invest remaining in NSC, government bonds, Post Office term deposits etc
Assuming the interest rates hover around the prevailing level of 7-7.8% or above, one can make
A1 crore in 15 years
Financial decisions
All decisions depend on a time horizon, individual goals, lifestyles and expenditure pattern.Expenses on house rent or house or car loan, household expenses, life and health insurance are unavoidable, but creating a H1 cr savings pool can be unlocked if one works with a single-minded goal of setting small financial goals and by cutting down discretionary spend