“Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.” - Albert Einstein
In my last post, I explained how two persons, one starting saving just 1000 per month at the age of 21 and other starts saving at the age of 22, would have a difference of more than 3.8 Lakh in their net worth at the time of retirement. That 12000 not saved earlier would become 3.8 Lakh at the time of retirement. This is the power of compounding.
In my last post, I explained how two persons, one starting saving just 1000 per month at the age of 21 and other starts saving at the age of 22, would have a difference of more than 3.8 Lakh in their net worth at the time of retirement. That 12000 not saved earlier would become 3.8 Lakh at the time of retirement. This is the power of compounding.
Compounding means, that the interest you receive on your investment/ saving today keeps on adding to your savings and investment for the future years, and hence the money keeps on growing exponentially. A simple chart on how FD investment of 1000 would grow over the next years -:
As you can see, the amount 1000 grows to about 3400 in the first 15 years, and then more than 14 times at the end of 30 years. The amount grows exponentially during the last years.
This is just assuming that a person has invested only 1000 during the start and then nothing after that.
To give a real understanding on this, let’s assume there are four people who start investing as follows. Assume that all of them invest in the same bank with a rate of interest of 9% and all of them are 25 years of age, retiring at the age of 60.
1) Akash ( A disciplined investor) – As soon as he gets a job at the age of 25, he starts saving Rs. 3000 every month and saves upto his retirement (For next 35 years).
2) Amar – He starts working, but thinks it’s too early to save, so he does not saves anything. At the age of 35, he realizes that he should start now, and starts saving double than Akash ie Rs 6000 for the next 25 years.
3) Ashish (A late investor) – He’s a person who does not invest anything, until he realizes it too late. So, in order to make up for it, he starts investing 30000 per month when he’s 50 years of age for the next 10 years.
4) Ajay (A smart and disciplined investor) – He’s the smartest of all. He thinks to save as much he can for next 15 years, and then stop investing since he’s in a phase of his life when he’s married and the kids going to school, and he also wants to spend money on himself. So, he saves Rs. 6000 per month only for the next 15 years (up to age of 40) and then stop investing anything, but does not touches the amount he has already invested till his retirement.
Who do you think is the most intelligent person?
Let us see what the net worth of each person will be when they retire at the age of 60.
Akash – Saves 3000 per month for next 35 years – 87,43,353 (87 Lakh)
Amar – Saves 6000 per month for next 25 years – 67,02,286 (67 Lakh)
Ashish – Saves 30000 per month for only next 10 years – 58,26,867 (58.2 Lakh)
Ajay – Saves 6000 per month for 15 years, which grows to 2273709 when he’s 40. Now he does not touches this and saves it in a fixed deposit for next 20 years. And he’ll have a net worth of – 1,34,83,425 (1.34 Crore) at the time of retirement.
So, you see that investing early in life rather than later makes a whopping difference at the end. This is because the interest that you get is much higher if your principle amount is huge, and the time to grow the money is also higher. The amount grows exponentially if given a chance to grow with a good time frame.
During these calculations, I assumed the safest option of bank recurring and fixed deposits giving a interest rate of 9%. But in the real world, with investing into stocks/ mutual funds and with reasonable time frame, one could easily get a return of 12-15%.
P.S. – For all the calculations, I used excel formulas, but you can check these at the following links.
http://allbankingsolutions.com/fdcal.htm
http://www.allbankingsolutions.com/Recurring-Deposit-Calculator-India.shtml
To give a real understanding on this, let’s assume there are four people who start investing as follows. Assume that all of them invest in the same bank with a rate of interest of 9% and all of them are 25 years of age, retiring at the age of 60.
1) Akash ( A disciplined investor) – As soon as he gets a job at the age of 25, he starts saving Rs. 3000 every month and saves upto his retirement (For next 35 years).
2) Amar – He starts working, but thinks it’s too early to save, so he does not saves anything. At the age of 35, he realizes that he should start now, and starts saving double than Akash ie Rs 6000 for the next 25 years.
3) Ashish (A late investor) – He’s a person who does not invest anything, until he realizes it too late. So, in order to make up for it, he starts investing 30000 per month when he’s 50 years of age for the next 10 years.
4) Ajay (A smart and disciplined investor) – He’s the smartest of all. He thinks to save as much he can for next 15 years, and then stop investing since he’s in a phase of his life when he’s married and the kids going to school, and he also wants to spend money on himself. So, he saves Rs. 6000 per month only for the next 15 years (up to age of 40) and then stop investing anything, but does not touches the amount he has already invested till his retirement.
Who do you think is the most intelligent person?
Let us see what the net worth of each person will be when they retire at the age of 60.
Akash – Saves 3000 per month for next 35 years – 87,43,353 (87 Lakh)
Amar – Saves 6000 per month for next 25 years – 67,02,286 (67 Lakh)
Ashish – Saves 30000 per month for only next 10 years – 58,26,867 (58.2 Lakh)
Ajay – Saves 6000 per month for 15 years, which grows to 2273709 when he’s 40. Now he does not touches this and saves it in a fixed deposit for next 20 years. And he’ll have a net worth of – 1,34,83,425 (1.34 Crore) at the time of retirement.
So, you see that investing early in life rather than later makes a whopping difference at the end. This is because the interest that you get is much higher if your principle amount is huge, and the time to grow the money is also higher. The amount grows exponentially if given a chance to grow with a good time frame.
During these calculations, I assumed the safest option of bank recurring and fixed deposits giving a interest rate of 9%. But in the real world, with investing into stocks/ mutual funds and with reasonable time frame, one could easily get a return of 12-15%.
P.S. – For all the calculations, I used excel formulas, but you can check these at the following links.
http://allbankingsolutions.com/fdcal.htm
http://www.allbankingsolutions.com/Recurring-Deposit-Calculator-India.shtml
No comments:
Post a Comment