Why you should start investing as early as today – Power Of Compounding explained!
There is a saying regarding trees which goes like, “The best time to plant a tree was 20 years ago, the second best time is today”. The same can be applied to investing too.
People do realize the importance of investments but it is not a priority for them in the early stages of their career. Paying bills, buying new gadgets, weekend parties take away most of the paycheck and often we do not have or have very little left at the end of the month. We delay making investments as we think that we can always make up for the lost time once we start to earn more and thereby investing a higher amount. However, making up for lost years in investment is not easy, even when you invest a higher amount.
Let us see an example:
Suppose, Mr. Ramesh is 30 years old and he wants a corpus of ₹ 1 Crore at the age of 60 year. If he starts investing right now, then he would have to save ₹ 1,796 per month (assuming a 15% annual return). However, if he delays the investment till the age of 50 yrs, then for the same amount of 1 Cr, he will have to save ₹ 38,466 per month which is 21.4 times more than the amount required at age 30.
Here is a graphical representation of the monthly investment required to have corpus of 1 Crore at the age of 60 yrs.
Cost of Delay
If Mr. Ramesh invests same amount of ₹ 1,796 from the age of 35 years, then at age 60 he will have ₹ 49.5 lakhs only. A delay of 5 years in investment will lower the wealth by more than 50%.
Invest 10 yrs early – get double returns with half the investment
If Mr. Ramesh invests ₹ 5,000 monthly starting at the age of 30 yrs, then he will have ₹ 2.8 Cr corpus at the age of 60 yrs.
What if Mr. Ramesh delays the investment for 10 yrs and at age of 40 yrs starts with double the investment, i.e. ₹ 10,000?
The corpus available to him at age 60 yrs is ₹ 1.3 Cr. This means if you delay your investments by 10 years, then despite doubling the investment you will get final value less than half of what you would have got if you have started 10 years earlier with the original investment amount.
All this is possible due to the “Power of Compounding”. Compounding is the most fascinating concept in investments and it is necessary for every investor to understand its importance. The magic formula of wealth creation is
A = P (1 + r/100)t
Where, A is the Final Amount/Corpus
P is the principal or invested amount
r is Rate of Return
and t is Investment period.
Most of the people focus on how much Return they can get, however it is not in their control. The most important factor here is “t”, the investment period which you can control and gain from by starting to invest early.
Invest longer – Create bigger corpus even with low rate of Return
Mr. X started investing at the Age of 25 years with an amount of ₹ 5000 monthly and gets only 10% return on your investments. At age 55 yrs, he will have a corpus of ₹ 1.04 Crore.
Mr. Y started investing late at the age of 35 years, but managed to get an impressive Return of 15% year on year on his investments. At the age of 55 yrs, he will have a corpus of ₹ 66.35 lakhs only.
Despite getting better returns Mr. B could manage only around 64% of the corpus when compared to Mr. B who started investing early.
The Key to Power of Compounding – Patience
As we can see, power of compounding is a fascinating concept. Another very important feature of power of compounding which every investor must understand is that it is very boring. Yes, you read it right, it is boring, and let us see why it is so.
Take the scenario in our first example where you were investing Rs. 1,796 per month for 30 years to reach a corpus of 1 crore.
Your corpus will reach to 1 lakh in 3.66 yrs. To reach Rs. 10 lakh, it will take 14.5 years. In next 6 years, that is in 20.4 yrs the corpus will reach 25 lakhs and for corpus to become 50 lakhs it will take less than 5 years (at 25.1 yrs) and in another less than 5 years, i.e. at 30 yrs the corpus will cross Rs. 1 crore.
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As you can see, in the first 15 years the corpus managed to reach just a bit over 10 lakhs, but in next 15 years, the growth becomes faster and milestones were achieved at a lightning speed. Hence, to enjoy the power of compounding, patience is the key for every investor.
So, start investing as early as possible and persist with the investment for long term to enjoy the full magic of power of compounding.
Start Investing in Mutual funds today on WealthTrust app, to enjoy the Power Of Compounding.
New to Mutual Funds? Learn more about basics of mutual funds here.