Early Start to Investments: How Does it Help?
We all know, intuitively, that the more we save and invest, the more will be the final corpus at the end of the investment tenure. We also know that the earlier we start, the more we will be able to save and invest.
But what tends to be missed out in this, is the phenomenal power of compounding. Compounding, in simple terms, means interest on interest, or returns on returns, if the investment is in the market, earned over the tenure. The outcome of this, over a long tenure, is huge.
Let’s look at this in terms of some numbers.
Let’s say you want to retire at the age of 60 and you’ve started retirement planning, from today. Pretty obviously, your investments will earn returns as per the market. Now let’s assume, 8% is the rate of return. If your target corpus size is Rs 1 crore at age 60 and if your current age is jh30 (i.e. if you have 30 more years), you need to invest Rs 6,665 per month. At a return rate of 8%, Rs 6,665 per month will grow to Rs 1 crore after 30 years.
Now, if your age is 40 i.e. you have 20 years to go, you have to invest Rs 16,865 per month to attain Rs 1 crore corpus, at the same growth rate. A significant jump from Rs 6,665 per month to Rs 16,865 per month. Similarly, if your age is 50 i.e. you have only 10 years to obtain Rs 1 crore, you have to save Rs 54,299 per month!
The big difference between Rs 6,665 per month to Rs 16,865 per month to Rs 54,299 per month is made not only by the amount of your savings, but also the power of compounding: the earlier you start, the longer the time your savings are earning and compounding at the market rate.
Let’s look at another set of numbers. You can save Rs 20,000 per month and this will earn returns at 8% from the market. If you do it for one year, your corpus becomes Rs 2,50,658. If you can do it for 10 years, your kitty becomes Rs 36,83,313 after 10 years, with the help of compounding. And if you can manage this for 20 years, you would have managed a kitty of Rs 1,18,58,944 i.e. you can become a crorepati by saving Rs 20,000 per month for 20 months!
Discipline is important. Start early and don’t miss your monthly installments. Otherwise, it is not difficult to become a crorepati within your working life. These calculations have not taken inflation into account; you will require that much more money in future as inflation will take away the purchasing power of your funds.
Hence, to beat inflation, better start saving early!