” The early bird catches the worm”.
All of us would have heard this famous proverb.When it comes to our personal investments,it cannot be more relevant.Let us see with an example, how important it is to start saving early.
Ram and Shyam are childhood friends aged 25.They have just finished their studies and started working.
Ram is conservative,thoughtful and meticulous by nature.On being advised by a professional financial planner,he starts investing Rs 1000 per month in a recommended Systematic Investment Plan.
Shyam too is keen on saving,but he decides to enjoy his new found financial independence for now and like most of us tend to do,decides to postpone his savings plans for sometime, till he settles down in his job and gets some financial stability.
At age 35 , he is impressed with the steady growth in Ram’s portfolio and starts investing Rs 2000/- per month (to make up for the lost time) in the same plan.
Let us see where both of them are at age 55.
Ram has saved Rs 1000/- per month for 30 years.Total amount invested is Rs 3.6 Lakhs
Shyam starts 10 years later, and has invested Rs 2000/- for 20 years.Total amount invested is Rs 4.8 Lakhs.
Assuming a conservative growth rate of 8 % p.a , this is how they have fared:
Ram : Current Investment Value : Rs 15.03 Lakhs
Shyam : Current Investment Value : Rs 11.84 Lakhs
Even after starting with the double the amount per month and investing 33 % more over time, Shyam’s investments are still 27 % lesser in value !! This is the power of compounding,which Ram benefited from due to an early start.
Conclusion : Remember the three mantras of investing :
Hello author, Nice post.
By the way, i was aware of compound interest, but the example and calulation you gave is awesome. I really like content made by self.