Twenty-20 cricket is more popular than the Test matches, mainly because a Test match takes 5 days to complete, whereas a T20 game takes only three-and-a-half hours. The new generation wants instant entertainment, and that’s why T20 (or 20:20) scores over the Test format.
If you love the 20:20 cricket format, it is easy to make money via investing. Let us discuss that in detail today.
20:20 in investing means embarking on a journey towards financial independence. It means creating a system that lets you not worry about money for the rest of your lives. It also means creating an additional source of income so that we are not overly dependent on our primary income.
What is 20:20 investing?
20:20 stands for investing 20 per cent of your income for a period of 20 years. This strategy will simply work for everyone, as the investable amount is expressed as a percentage of income rather than a specific amount. Let me illustrate it with examples.
If your monthly income is ₹1 lakh. The 20:20 rule states that you need to invest 20 per cent, i.e., ₹20,000 per month, for a period of 20 years. Assuming a 12 per cent annual return, your portfolio would grow to ₹2 crores in 20 years.
This capital of ₹2 crores is more than enough to give you a monthly income of ₹1 lakh for the rest of your lives. Even if you withdraw for 40 years, your final portfolio value would never reach zero, assuming an annual return of 12 per cent.
This ratio works if your salary is ₹10,000/month or ₹1 crore/month, because your monthly expenses are always a fraction of your income. A person earning ₹10,000/month will always have a lower expense than a person earning ₹1 lakh/month. Hence, the corpus being created over 20 years is perfect for your income bracket.
Now, let us talk about some variations to keep up with the rising expenses. We all know the threat inflation poses to our purchasing power. Every year, we lose approximately 5 per cent against our savings. The solution is to increase your monthly contribution by at least 10 per cent. This aligns well with your annual salary increment.
The revised numbers work out as per the figure below. A monthly SIP of ₹20,000 per month, increasing by 10 per cent per year, would create a corpus of ₹3.98 crore over 20 years, assuming 12 per cent annual returns.
Let us assume our expenses also rise every year, starting with a monthly withdrawal of ₹1 lakh. Even if we increase our monthly withdrawals by 10 per cent each year, we will never run out of capital over 40 years, assuming 12 per cent annual returns.
The ratio 20:20 is so magical that no other combination yields a similar result. You could try investing 30 per cent for 10 years or 10 per cent for 30 years, but the results wouldn’t inspire you to take action.
This also means that if you are 25 years old and starting a lucrative career, it is the best time to plan your retirement 20 years from now. By the age of 45, you would have created a system that could generate a monthly income for the rest of your life.
This is simply the actualisation of Financial Independence, as you can take control of your time. The choice to continue your job or follow a not-for-profit passion is at your disposal, because the money part is automatically taken care of.
All you need to do is invest 20 per cent of your income in an instrument that returns more than 12 per cent annually. When your salary goes up every year, make it a practice to top up the SIP contribution.
Happy Retirement!
The writer is a SEBI Registered Investment Adviser (INA000021757), SEBI Registered Research Analyst (INH000025054), and author of ‘How to join the top 1% options traders club’.
DISCLAIMER: Investments in the securities market are subject to market risks, including the potential loss of principal. Past performance does not guarantee future results. Information provided is for educational purposes only and should not be considered financial advice. Investors should read all related documents carefully and consult a certified advisor before investing. Registration granted by SEBI and Enlistment with RAASB/BSE and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. The investor is requested to take into consideration all the risk factors before actually trading in stocks or derivatives.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.