What expenses did you add to your list the last time you got a salary hike?

Maybe you spent more on rent, groceries, travel plans, or your weekend outings. But did you consider increasing your SIP amount? Even disciplined investors tend to overlook this prospect of building wealth.

While a static SIP looks fine on paper, it doesn’t account for rising inflation or things becoming expensive. That’s where conscious investors consider stepping up their SIPs. As your income grows, you need to increase your SIP amount in the same proportion.

In this blog, we have comprehensively explained how step-up SIPs work and how young investors can use this instrument to build more wealth.

Why Traditional SIPs Aren’t Enough in a High-Inflation World

Inflation makes everything more expensive, including daily essentials, luxury items, and most commodities. So, even if you stay invested in SIPs for 10 years, contributing the same amount slows down your long-term growth.

Consider lifestyle inflation, which includes higher rent, new gadgets, holidays, and even courses to upskill yourself in your profession. Over time, the gap between what you invest and what you need is likely to widen.

A traditional SIP doesn’t account for these changes. However, a yearly increase in your contribution helps in addressing rising inflation. Today, many investors use an SIP calculator that factors in a standard percentage of inflation to see how much they need to invest to reach their goals.

What Is a Step-Up SIP and How It Work?

Simply explained, a step-up SIP involves an approach where you keep increasing your SIP amount every year. This can either be a fixed amount or a certain percentage of your previous contributions.

This approach reflects your real life, where you might be receiving annual salary increments. As your contributions rise over time, you enjoy the benefits of compounding even more over the long term. Use a step-up SIP calculator to check how drastically you can grow your wealth for various goals.

Key Step-Up Strategies for Beating Inflation & Salary Growth

Here are some common step-up SIP strategies.

1. Percentage-Based Step-Up

Percentage-based step-up involves increasing your SIP contribution between 5% and 10% every year. This method is the most popular and works perfectly for salaried individuals with predictable increments in income.

2. Fixed Amount Step-Up

When you set a fixed amount, you keep increasing your SIP amount by a pre-decided figure like INR 500, INR 1000, or INR 2000 each year.

3. Bonus or Windfall Step-Up

When you receive bonuses or yearly incentives, simply deposit a part of the amount into your SIP instead of spending it all. This approach prevents impulsive expenses and strengthens your long-term goals, like retirement or buying a house.

How Step-Up SIPs Outperform Static SIPs

Step-up SIPs consistently perform better than your static contributions. The reason is, you keep increasing your overall investments every year. For instance, if you create a flat SIP of INR 5,000 a month, it will grow well over 20 years. However, your final corpus at the end of the same tenure can be significantly higher if you decide to step up your SIP amount by 10% annually.

The combination of rising investments and compounding helps you beat inflation. It also adjusts for evolving lifestyle goals like travelling or funding your children’s education.

The best part about step-up SIPs is that they fit naturally into your financial journey. You just need to increase your contributions with a rise in your income.

When Step-Up SIPs Work Best

Step-up SIPs are ideal for young investors, particularly when they are at the early phases of their careers. At this stage, you expect regular increments or business growth.

So, if you are planning long-term goals like retirement or the higher education of your kids, this strategy fits perfectly. You can simply invest more without any sudden financial pressure.

Investors looking to beat inflation in the long run through disciplined monthly contributions also find step-up SIPs an ideal strategy.

Practical Checklist Before Starting a Step-Up Plan

These guidelines will help you start your step-up SIP with a practical approach.

• Before investing in a step-up mutual fund scheme, review the pattern of your salary growth over the last few years.
• Make sure you have an emergency fund ready.
• Stick to a step-up percentage that feels comfortable considering your finances.
• Match your SIP growth with long-term goals.
• Re-evaluate your step-up plan every year and increase contributions as required.

Conclusion

When you plan your long-term finances, a realistic approach is to factor in inflation and rising expenses. It’s smart investing that can help you stay ahead. With step-up SIPs, you can align your investments with the growth in your income. If you’re already investing in a mutual fund, consider implementing the step-up strategy. Young investors enjoy an even better opportunity to plan their SIPs practically.