The best time to plant a tree was 20 years ago, the second best time is now. This Chinese proverb is very much relevant to a lot of things in life, investing included. Read along to understand why one should start investing ASAP!!
What is Investing?
Investing is the calculated act of allocating money in various instruments with the expectation of generating income or profits or capital gains. This very intent of investing differentiates it from savings, which is often used interchangeably.
Why starting early matters?
When you are young and early in your career, money is scarce and so is the amount you can set aside for investing. But it’s those tiny amounts you save early on that bring in the most returns. Let’s understand why that’s the case.
Compounding takes time
Warren Buffett, one of the greatest investors of our time started at 11. Yet, he often says he should have started earlier. The initial investments one makes, though small in quantity has the potential to grow over time to huge numbers over the years one stays invested. Anyone aware of the concept of time value of money would agree to this.
Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it.~ Albert Einstein
I’ll explain this with an example.
Take Krishna and Ram they both are 25 years old young engineers. Krishna on his father’s advice and help started investing ₹2000 per month starting age 18. At age 25, Krishna met Ram and educated him about the importance of investing. Consequently, Ram taking Krishna’s advice did the same.
Krishna, to help Ram understand the power of compounding, challenged Ram that, even if he stopped investing anymore, he’ll still have more money than Ram at age 60.
Accepting the challenge, Ram also started investing ₹2000 per month without a break for the next 35 years (until age 60). During this time, Krishna just waited with the money he invested in his initial 7 years.
Whom do you think might have won our hypothetical challenge?
Of course, Krishna!!
I’ll break down the math for you.
Age 18: Krishna invests ₹2000 per month until age 25.
Amount Invested till 25: ₹2000x12x7 = ₹1,68,000.
Assuming a nominal 12% return, the invested money would have grown to: ₹ 2,63,957 by age 25.
Krishna then stops investing, but lets the accumulated amount compound till age 60.
Assuming the same 12% return, the invested money would have grown to an astonishing ₹1,72,38,924 by age 60.
Ram, on the other hand, starts investing at age 25., Assuming the same 12% let’s see how much he made by age 60.
Amount invested till 60: ₹2000x12x35 = ₹ 8,40,000
Assuming the same 12% return, the invested money would have grown to only ₹1,29,90,538 by age 60.
That’s a difference of about 40 lakhs even though Ram invested 5x more than Krishna.
Here, Krishna is reaping the benefits of starting early.
Most Indians are not comfortable investing directly in equities, they prefer the liquidity and stability of fixed deposits. Little do they understand that a hidden tax on savings inform of inflation is eating away their gains (more on that in a future article). But the underlying fact is that inflation is a factor most don’t consider while making investments.
Inflation would affect any investment over time. As a result, care should be taken to ensure that the investment instrument must first keep up with inflation to increase “real purchasing power”
Furthermore, the fact that inflation hurt savers more is a reason why one should “invest”, that too, in inflation beating instruments.
If we take the above case of Krishna and add in inflation factor of 6%, his portfolio would have only grown to a meagre 17 lakhs of “real purchasing power” by age 60.
Everyone has financial goals, be it retirement, the dream home or car, foreign vacation, child’s education/marriage, etc. Therefore, it makes perfect sense to plan for it well in advance.
Where to invest?
There are multiple avenues to invest which I will try to cover in detail in future articles, such as:
- Fixed Deposits
- Recurring Deposits
- Mutual Funds
- Real Estate
- Gold, etc.
Interested in reading more about each of the above instruments? Let me know in the comments below which instrument you’d like me to write about next. Also, don’t forget to subscribe to our newsletter to receive the latest updates on our latest articles.
Calculator: Magic of Compounding Calculator
Previous article: Decoding Union Budget
Further reading: The Intelligent Investor
Hi Krishna Ram,
Loved the article. You have nicely explained the concept and well framed quotes I must say! I would be interested to know more about REIT investments and about bonds. Please share your views on the same. Thank you!
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