It’s not easy to become rich. And while making such a statement, I am ready to ignore the definition of ‘Rich’ too. If you don’t consider yourself to be rich, then you already know how tough it is to become one.
And just to verify the concept of ‘Being-Rich-Is-Difficult’, go out and ask someone you consider to be rich. I am sure that they will also tell you that it is not easy to become rich. And it’s even tougher to stay rich.
But no matter what anybody else tells you, my view is that the biggest tool you have in your journey to become rich is Time. If you have time on your side, even small amounts can become eye-popping(ly) huge – as you will see in this case study.
So lets get straight into a some numbers….
There are two friends named Vineet and Raunak. Both are of same age (25) and earn decent amounts of money, which theoretically gives them the option of investing a fixed amount every year (after expenses).
Scenario 1:
Vineet is frugal and believes in saving. He knows that he does not have a rich inheritance and hence, needs to save for himself and his family. Vineet starts investing Rs 1 lac every year. But he does this only for 10 years between the age of 25 and 35, i.e. he saves a lac rupees every year for 10 years and then stops.
His total contribution is Rs 10 lacs (between age 25 and 35).
Raunak on the other hand thinks that since he is quite young, he can postpone saving/investing for future. He thinks that if he does not save starting from the age 25, and does it after a few years…even then he will be able to become very rich.
So in this example, Raunak starts investing the same amount as Vineet (Rs 1 lac) at the age of 35 and continues doing it upto the age of 60.
Raunak’s total contribution is Rs 25 lacs (between age 35 and 60).
Now comes the day of reckoning. Both have reached the age of 60.
What’s your guess? Who has more money at age 60?
It might sound surprising, but the answer is Vineet. Having contributed just Rs 10 lacs, Vineet now owns a huge corpus of Rs 6.65 Crores!!
And what about Raunak? The answer is that he becomes rich too. But having contributed Rs 25 lacs, he has accumulated a much smaller corpus of Rs 2.36 Crores. And that is despite having invested for 15 more years than Vineet.
Scenario 1: Vineet (Rs 6.65 Crores) – Raunak (Rs 2.36 Crores)
Here is the calculation sheet for your reference. The return assumption in this and further scenarios is 14% per annum.
Lets go on and evaluate a few more scenarios…
Scenario 2:
Vineet is still frugal and still believes in saving. Like the first scenario, Vineet here also invests Rs 1 lac every year from the 25 to age 35. But Raunak has changed. Though Raunak still does not save anything between the age 25 and 35, he now does realize the power of compounding. So he decides to invest the double amount (than that of Vineet) between the age 35 and 60.
That is, Raunak invests Rs 2 lacs every year for 25 years.
So in this particular case…
Vineet’s total contribution is Rs 10 lacs (between age 25 and 35).
Raunak’s total contribution is Rs 50 lacs (between age 35 and 60).
Once again, the day of reckoning arrives and both reach the age of 60. What’s your guess now? Who has more money at 60?
Answer once again, and surprisingly enough is Vineet!
Vineet still attains a corpus of Rs 6.65 Crores as in the first scenario. But Raunak after doubling his investments is still able to reach Rs 4.73 Crores. Now you see? This is the power of investing early. And so big can be the difference when you delay your investments.
Here is the calculation sheet for your reference.
Scenario 2: Vineet (Rs 6.65 Crores) – Raunak (Rs 4.73 Crores)
Lets move on to other scenarios now…
Scenario 3:
Now lets make this analysis more realistic. As we progress in life, our incomes generally rise. And so do our expenses. So shouldn’t our investments and savings also rise with time?
Suppose you start your career earning Rs 20,000 a month. And you also start investing Rs 5000 a month at that time. After a few years, your salary is almost Rs 70,000. And if you are still investing just Rs 5000, then you are fooling yourself. Investing is done for one’s own future. And it’s one’s own responsibility to maximize it as soon as possible.
So lets get back to this new scenario.
Here Vineet starts by investing Rs 1 lac at the age of 25. But over the next 10 years, he increases his yearly investment by a small 5%. So over a period of 10 years (between 25 and 35), he invests Rs 12.58 lacs.
On the other hand, Raunak starts late at 35 with Rs 1 lac a year. But he also starts earning more and more every year and is able to increase his yearly investments by 10% (double that of Vineet’s 5%). His total contribution over a period of 25 years (between 35 and 60) is Rs 98.3 lacs.
Day of reckoning…
I wont even ask you this time. 🙂
Once again, Vineet has more money when he retires at 60!! Vineet manages Rs 7.94 Crores in comparison to Rs 5.08 Crores accumulated by Raunak.
Isn’t this amazing? Starting as early as possible and just investing for few years and then just waiting. And after a few decades, you have more money than someone who started late, invested many times more than what you invested.
This is indeed the 8thWonder of the World. We need to give standing ovation to the concept of Compounding. 🙂
Here is the sheet for 3rdscenario’s calculation.
Scenario 3: Vineet (Rs 7.94 Crores) – Raunak (Rs 5.08 Crores)
So lets move on to the 4thscenario.
Scenario 4:
There is only one change in this scenario over the 3rd one. I am making this scenario more realistic. And the change I am making in this one is based on the question that why should Vineet stop investing at age of 35? Shouldn’t he continue further and upto the age of 60?
So here is it….Vineet does not stop investing at 35. He continues investing upto 60 and increasing his contribution by 5% every year. Compared to him, Raunak increases his contribution 10% every year.
To cut the long story short, after 60 years, Vineet has Rs 13.3 Crores and Raunak has Rs 5.08 Crores.
I have nothing more to say for this scenario. 🙂
Scenario 4: Vineet (Rs 13.30 Crores) – Raunak (Rs 5.08 Crores)
Here is the sheet for your reference.
I can go on and on with more scenarios but that would only help the case of investing early, which we have already proven in previous four scenarios. For example, we can reduce the return assumption from 14% to smaller numbers, etc. But the point which I am trying to make through this post, is, that there are some really amazing benefits of starting early when it comes to investing.
You can start later and still get to the same final corpus. But that would require you to earn much higher rates of returns…and that too for many years – which is neither easy nor practical.
And just to illustrate this, here is the 5th scenario 🙂
Scenario 5:
Vineet invests Rs 1 Lac for 10 years (from 25 to 35)
Vineet’s Return assumption = 14%
Corpus at age 60 = Rs 6.6 Crores
On the other hand,
Raunak invests Rs 1 Lac for 25 years (from 35 to 60)
Raunak’s Return assumption = 20%
Corpus at age 60 = Rs 6.8 Crores
Scenario 5: Vineet (Rs 6.6 Crores @ 14%) – Raunak (Rs 6.8 Crores @ 20%)
Both have accumulated almost same corpus after reaching 60. And Raunak has started 10 years late and invested for 15 more years. But do you think 20% per year return can be attained? I don’t think so. It’s almost impossible. It is not a reasonable expectation to have.
For your reference, here is the calculation sheet of Scenario 5
All these five scenarios show that if you start early, you don’t need to earn eye-popping rates of returns to accumulate big sums of money. All you need is time. And when you start early, you have a hell lot of time. The earlier you start, longer does your money have the time to grow.
And to end this analysis, I leave you with a very small 4-Step guide to help you become amazingly rich:
1) Start early
If possible, invest from the day you start earning your first salary. You would be surprised at how much these small amounts can increase when invested for long periods of time.
2) Treat Investments as Monthly Bills and be regular with them.
Unless and until you have the discipline to invest regularly, you can forget about accumulating a large corpus by the time your retire. You should invest first and then use remaining money for expenses.
3) Do whatever it takes to maximize the amount you can invest
First thing is that no matter what happens, you need to invest regularly. And in case you have surplus money, make it a point to invest as much of it as possible.
4) Be patient. And in long term, you will need loads of it
One of the biggest mistakes people make is that they withdraw/touch the money they start accumulating. The biggest problem of compounding, or I should say the power (not available to many) is that it works best, when you do not disturb it. In initial few years, the results will seem extremely slow. And you will start losing your faith on it. But hold on. In a few more years, you will realize the power of compounding.
This post clearly indicates that there is price to be paid for any delay in investing. And mind you, this price is not small. You can delay and still become rich. But remember that the biggest side effect of procrastination (when investing) is that you will not become as rich as you might have become, had you not procrastinated.
So irrespective of your age, do not wait any further. Go on…Now is the time to begin investing for long-term. And remember that the cost of delaying your investment is enormous. Even one year makes a huge difference.
Amazing analysis…Only favorable scenario for Raunak is if he starts 2-3 years later , invests more and gets more returns than Vineet…truly shows the power of time in investment returns.
People often focus on Warren Buffet's investing skills and forget that he started really young , at the age of 11 years. His wealth is result of mediocre returns using other people's money for a long , long period of a time. If he had started in his mid-thirties using the same amount of money and achieved the same returns , he would have been seriously wealthy , but he wouldn't be the Warren Buffet we know today
Thanks Nishanth 🙂
And what you say is correct..People focus so much on results (like finding multibaggers, etc) that they just forget that it takes common sense to end up richer. Start early, maximize investments and have patience. That's it. You are rich 🙂 But its hard for people to understand it.
Eye popping indeed. This lesson should be included in school syllabus especially since younger generation seem to believe in living on credit.
Amazing article… Definitely a comprehensive guide to the power of compounding… BTW, why no boring Tuesday posts these days?
Correct…it is high time that personal finance is included as a subject in schools now
Thanks 🙂
And I have to restart the Boring Tuesday series. Will do it soon 🙂
Compounding is the 8th Wonder,true.
One Question,Since I am in college 2nd Year. How to start now ?
Good article about Power of Compound..!!!
But where to start..to invest 15 years time frame Stocks,Mutual Funds,Bonds and FDs…
The best thing you have done is you are thinking about it at this age even though not earning probably. Do you have some pocket money?? Try saving some and then create a SIP on an MF. I am saying starting with 5K at least and then a SIP of 1000 maybe.
Start with Mutual Funds by selecting a good Fund Manager. Bonds & FD should have some money too for downtime in market and even some liquid cash too.
Stable Investor is by far one of the best blogs I have found in recent times.
That is major problem to find the best fund houses…Except holdings other are going good.,
Dev, brilliant post and if this doesn't bring home the point of starting early for young investors, i wonder what will !
The reason people think about and try fast-forwarding the results is that when you're past certain age, there's no way to regain the lost years. There's simply no way – time lost is lost forever. Internet was not so pervasive a decade back and there was far less awareness on personal finance issues. That way our young generation is very fortunate I'd say. Having said that mid-aged and seniors have to persist in their financial goals as far as they can reach with balance of safety, liquidity and returns. Good luck to all !
Thanks Nasirul 🙂
Glad you found it useful…
Thanks Ritesh 🙂
And you have actually hit the nail in coffin when you say that we can never bring back the lost years in investing. And the worst part is that this realization generally occurs when people get closer to 40-45. But by that time, its already too late…
I know someone (aged 45+), with whom I used to discuss about compounding (as a concept) a lot. And I could literally see that man in despair because there was absolutely nothing which he could do as he had already lost the primary years by not investing adequately…
And yes…we are very very fortunate to have all the resources…
Hi Divyam
I agree with Nasirul below and am glad that you are thinking on correct lines from the very start itself. Great
If you are using your pocket money to invest, its best to start a small SIP in a diversified mutual fund.
But its possible that you might have side-income from some projects. In that case, I would suggest creating a small corpus before going into investing. But if you have a regular side income, just start a SIP.
Agree with you Nasirul 🙂
Thanks Shreeux
If you are sure about the tenure of 15+ years, then go for well diversified mutual funds.
But do keep some money in fixed or other deposits as emergency fund.
Thank You 🙂 I have ₹20,000 savings and I can save ₹1000 every month. Now the question is how to choose a mutual or an Equity Fund. Secondly what about investment in ETF's.
There are a few fund houses which have been able to perform decently well in both bull and bear markets. Its best to stick with them
I have made a corpus of around 5L presently in 3:1 FD and Savings, i'm graduating this year and would be working in some time: before i join my work: I want to set up a portfolio to do SIP. Scripbox vs. ZipSip any good?
Also, how should i park the lumpsum before i start doing SIP; as in how to time it according to the market, is the market foreseen to go down in some time?
Brilliant post. Liked it… 🙂
Awesome post…. Very clearly depicted by images…. Just went through the images and the content is picture clear…. superb !!!!
Why not invest directly with the AMC itself in 'Direct' funds….
Why not invest directly with the AMC itself in 'Direct' funds…..
Thanks for your kind words Hemanth 🙂
Thanks Anup 🙂
You can go for direct MF SIPs instead of routing it through mediators. It will be beneficial in the long run.
And there is absolutely no need to time the market. You are young and you have a lot of time on your side. Just do the SIP and if need be, do a STP.
Once again in your case, by the time you will need the fund, these short term market ups and downs will have absolutely no meaning at all.
Agreed…
You rightly said it, Dev.
Here's another one from Oscar Wilde who said “No man is rich enough to buy back his past.”
Unfortunately, I must say I'm in Raunak's
situation. I'm 33 now and I started my investments only 3 years back i.e when I
was 30; even though I started working when I was 23. That means I lost 7
precious early years of compounding. But I would attribute it to my lack of
knowledge in equity and fear of anything associated with equity. So much so
that even my parents were dead against equity and warned me to never ever
invest in equities. For them good investment meant only real estate and land.
We didn’t have useful blogs like this when I started working and so there was
no avenue to gain knowledge. But gradually I started picking up
knowledge from peers, colleagues and ofcourse personal finance blogs and slowly
started investing in equity mutual funds. The more the knowledge I gained, the
more aggressive I became in terms of risk taking ability by moving from
balanced funds to large caps to midcaps/diversified equity and even sector
funds. But by the time I had begun planning aggressive investments in equities,
as stated above, I had lost 7 fruitful years. To make up for the lost years, I’m
now investing maximum possible with yearly additions. I’m saving and investing upto
50% of the monthly salary into equity MFs. I’ve promised myself no debts, no
loans, no expensive items and only frugal living. Inspite of taking all these
steps, I really don’t know whether I’ll be able to make up the lost years and
compensate for the delay in starting my equity investments. I really wish if
someone could have guided me during the beginning of my career about personal
finance and if I could have started early… but then the time lost is lost
forever.
“Der aaye durust aaye”… “Better to arrive late, than not start at all”….
However, might be better to consider a balanced portfolio, instead of an agressive “all or none” approach with only equity as the mainstay. Returns would be slightly lower, but since some sectors do well when others are in doldrums or sinkholes, the returns would probably be higher in all circumstances, not just the best case!
Investing in a bit of gold, a bit of fds, PPF, a bit of liquid funds, index funds, equity, and last but not the least LAND (though the entry load is extremely high) will ensure a safer, and better retirement.
Returns are only possible, if the principal is safe. Overinvesting in just one form of investment is a great way to retire a pauper!
excellent post… though this example is given by other financial advisors and sites, I esp. liked the way you worked out the OTHER scenarios, including the one where the first person keeps on investing after 35!
Very useful!
wow… excellent… way to go! Want my son (4 years old) to grow up as savvy as you.
guess your Tuesdays are more exciting now! 😛
Past only find out best one for all markets..For future unable to predict the best one or otherwise select at least 5, then 2 ro 3 to be a best..!!!
Thanks Bharat 🙂
Wanted to extend this common example to depict more scenarios.
Ha ha… will do it soon Bharat 🙂
I am glad that you are so honest with yourself Nanda. But ou should also note that in these examples, especially the latter scenarios, I have increased the yearly contributions by small percentages like 5% to 10%. You never know if you can increase it by much more than that?
And what if in next few years, you are able to add lump sum amounts at regular intervals. That can in a way help compensate for lost years.
But having said that, all I will add here is that dont worry. Life is much more than just ending up with the biggest portfolio. You should be happy that you are atleast now taking the right course of action. There are so many out there who are still putting their money here and there without any regard for asset class, returns or risk.
So cheer up!! 🙂
Loved the last 2 sentences Bharat 🙂
@Nanda
By the way, I will add my 2 bits here – Just to compensate for lost years, you should not become overtly aggressive. Always remember that return OF capital is much more important than return ON capital.
I think I will try doing a post on choosing a good-enough MF scheme soon.
Excellent post dev. As usual distilling a core and fundamental concept, i.e. start early and be regular when it comes to investing. Cheers!
Thanks for your words of encouragement Dev. It's true that I've become overtly aggressive just for the sake of compensating my lost years. I think I'll be careful from here on…
3 years back, I was entered 5 funds..Now 3 are average return..compare to others..again i was plan to switch over to best one.,
After 2 or 3 years, again i was pushed to switch mode..find out the best one..If this happen regularly, What will happen my investment in future…!!!
Thanks Anoop 🙂
Great article. Dev, your ingenuity to run the figures to dispel the myths is awesome. No one could ever dispute the facts. However my preference is to take 10% return rather than 14%. If we take 10% return, you would not see vast difference in most of the scenarios listed. But then 14% scenario is not that bad given that SENSEX returns matched 14% for the last 30-40 yrs.
Let me share my side of the story. This article brought back bad memories of my worst mistakes in my life. I started to earn at the age of 21 and by age of 34, I had zero savings (Not even PF) with debts of 30 lacs. Blame it on poor understanding of fin products, family commitments, medical reasons, set backs, losses, poor planning, bad spending habits and over confidence, almost got wrecked.
The last two years (33 &34) became damn tough and unable to sustain myself with salary. Literally lived on credit cards and interest burden (cc & personal debts) started to absorb entire my monthly salary.
From absolutely wreckage scenario, steadied the ship during last 8 years. I don't have any debts now, has a decent corpus (8 digits), loan free home & car and more importantly could afford a second kid. How did I do it?. It could be next article.
Thanks for sharing your story Krish. Are you interested in sharing the story in more detail?
If yes, please drop a mail on stableinvestor@gmail.com
HI SIR,
I AM 26 YRS OLD. GOOD EXAMPLE FOR ME TO INVEST ON RIGHT TIME. I HAVE ALSO THINKED ABOUT THAT TO INVEST IN LIC PENSION PLA THROUGH JEEVAN ANAND POLICY. MAY BE DON'T KNOW IS IT RIGHT DECISION OR NOT! KINDLY ADVISE ABOUT THAT I HAVE TO INVEST 2000 PER MONTH FOR 10 YRS. ANOTHER THING I WANT TO ASK THAT YOU HAVE MENTION 14% RETURN SO WHERE WE CAN GET FIXED 14% INTEREST? SO I CAN GO TO THAT WAY FOR GETTING MORE BENEFIT IN MATURITY AMOUNT. THANKS IS ADVANCE.
This is one of the best analysis Dev !!!
I have saved those sheets and every time it amaze me when I see them…Power of compounding as they say.
One request: Can you do the same analysis by taking random returns every year and some years of negative returns.
Thanks
Shyam
Thanks Shyam 🙂
Glad you found it useful. And I am adding your request in the list of topics I plan to cover in future. But it might take me some time…
My request to you is that do not keep switching funds just because it is not the best one. You must have a reasonable expectation of returns in mind. For example – I think a return of 15% is good. But if my fund is giving me 16% and there are others which give 19%, I will not switch my funds in a hurry.
So stick to your funds but if they are underperforming the averages too, then think of switching.
The 14% return assumption is used for calculations and is the average % which I expect markets to provide in long term. There is no known product in India which can give assured and fixed 14% returns. Its an average which I am looking forward to when investing for long term.
Hi,
Thanks for a crisp and clear post. Dispels a lot of notions without much ado!
Alas! for me i am in a situation worse than that of Raunak and what Nanda had expressed. Saving and investment were an anathema to me – atleast till recently. And, by the time i realised i reached 50. Pretty late in the day to make up for lost time. I now realise that however hard i try may not be able to make up the corpus i may require. Nonetheless the effort is on with a substantial amount every month in SIP’s.
I am writing this to express my predicament and seek inputs what i can do to improve my situation.
Thanks
At 50, my guess is that you have another 10 earning years (correct me if wrong) left. So atleast ideally, the equity component cannot be very large now or even going forward. But it actually depends on your current networth, expenses and a lot of other factors. I can only share my views if I have more information about yoru situation. If you want to discuss this, please drop me a mail at dev@stableinvestor.com
Hi Dev
I follow your posts and I am trying to be a fellow stable investor. While I am in the bracket of save more and remain protected later, I want to know if you have a post on how to manage corpus (say 5 cr) once retired?
With scenarios like – monthly income from age of retirement to death (say one retires at 50 and lives until 80, or 60 to 80 or 45 to 80 even). How will management of the corpus vary over time?
Please direct me to that post or let me know if you want to write like that something later.
Hi
I have not yet written any article on this. Will try to cover it in future ones though.
This is a very great analysis. But, what if someone starts late due to life circumstances. How can someone makeup for the lost time?