Case Study – When investing for 10 years pays more than investing for 30 years

 

But benefits of starting early cannot be matched easily by other reasonable approaches (like even investing more in later years). And I did some calculations that once again prove that as far as saving and investing are concerned, best advice is to START EARLY.

Next piece of advice? Don’t doubt the two words of the advice above. 🙂

The calculations that follow are based on certain assumptions, which you might question. I have tried to address the concerns later in the post. But I suggest that you focus on the crux of the story here, which is – to start investing early.

Scenario 1:

Suppose a person who starts earning at 23, is able to save Rs 1.5 lacs every year for next 10 years. He then stops (at 33) and doesn’t invest anything till his retirement.

 

What will his corpus be at the age of 60 (i.e. retirement)?

 

I will bypass the discussion on expected returns and how resorting to better asset allocation strategy can increase expected returns. Instead, lets use a reasonable and constant return assumption of 8% per annum.

 

Calculations show that at 60, his corpus would be about Rs 2.02 crores.

 

Now remember that this person has contributed a total of Rs 15 lacs from age 23 to 32. And not a rupee more after that.

 

Scenario 2:

Lets take the case of another person who realizes the power of compounding a little late and starts at 31. He continues investing Rs 1.5 lac every year till his retirement.

In total, this person would have contributed Rs 45 lacs in 30 years.

And he will end up with a corpus of Rs 1.83 crores.

See the difference?

 

Now we all know that its not possible to invest a very large amount at the start of our careers. The annual investments gradually increase with increase in income. And in reality, investments neither stop at 32 (like first scenario) nor they remain constant between ages 30 to 60 (like second scenario).

 

So this is indeed a theoretical exercise. But it serves the purpose of highlighting the importance of starting early.

Scenario 3:

Now lets take another scenario:

 

Suppose your parents decide to invest Rs 1.5 lacs for 2 years after you were born. Then from the age 2 to 60, neither you nor your parents contribute anything. Unreasonable assumption but lets stick to it.

 

Result?

 

Corpus of Rs 3.15 crore at the age of 60.

 

The reason for this astonishing outcome is that Rs 3 lac invested immediately after your birth had many decades to compound.

And by the time you turned 23 and were ready to earn your first rupee, your corpus was already in excess of Rs 18 lacs. That’s a good amount to start with. Isn’t it? A big snowball to start rolling for someone who is yet to earn anything. 🙂

Again the assumption of Rs 3 lacs can be questioned. An amount of Rs 3 lacs was huge 23 years ago. But again, this is a theoretical exercise. It only proves that starting early works. It just does.

 

 

But don’t get disheartened if you are unable to invest in line with either of the first two scenarios or if your parents did not do anything like the third one. 😉

When it comes to compounding, there is no amount too small to start investing.

And remember that in initial years, you will not notice the impact of compounding. Its only after years that compounding starts to show its magic.

1. How a 10-Year delay can Destroy your ‘Get-Rich’ Plan?
2. How to manage your finances when you get your first job?
3. Power of Increasing Your SIP by 5% or 10% Every Year