Spending often is an automatic response. Savings is an acquired discipline. It is, therefore, important that you adopt a process that facilitates your savings habit. In this article, we discuss an investment process, a form of commitment savings, that you can adopt to accumulate wealth.
Investment process
Your investment process must have two elements. One, the process must systematically save from your post-tax monthly income. And two, it must not be easy for you to withdraw money and spend the accumulate wealth before the end of the time horizon for a life goal. To address the first element of the process, you can adopt a systematic investment plan (SIP) for your equity and bond investments. You can setup an SIP on an equity ETF or an equity index fund or an active fund. You can do the same for your bond investments- setup a recurring deposit with your preferred bank.
What about the second element? Banks typically charge a penalty for premature withdrawal of recurring deposits. This ought to discourage you from withdrawing the money before the end of the time horizon for a life goal. Typically, the maturity of your deposit will match with the time horizon for a life goal. But this argument cannot work for equity investments.
Your equity investments can be withdrawn easily; you can typically redeem your fund units without any exit load after one year from the date of investment. You must, therefore, setup a process to avoid selling the investments and spending it before the end of the time horizon for a life goal. At the same time, you must you have the flexibility to take-out the gains and reinvest the proceeds in bonds to reduce the risk of losing your unrealized gains should the market decline. To balance these two requirements, you must adopt a rule to take-out gains. Next, you must allow your spouse, partner, sibling, or parents to operate your equity investments. That is, you setup the SIP, and they control the redemption decision; you must convince them why you want to sell your equity investments before the end of the time horizon for a life goal.
Conclusion
Setting up an investment process is important to accumulate wealth through your investing life. The reason we must depend on a process, or a commitment savings device is because we typically suffer from present bias. Spending today brings us more happiness then saving today to spend more in the future.
(The author offers training programs for individuals to manage their personal investments)