George Bernard Shaw had it right when he said youth was wasted on the young. When you’re in your 20s, your typical worries include graduating from college, getting a job, and chating in web. Thinking about how you are going to fund your family doesn’t usually top your list of concerns.
Take the Benefits of Power of Compounding
Thanks to the magic of compounding, money saved early on has more time to grow. In fact, for every 10 years you wait before starting to save , you’ll need to save roughly three times as much every month in order to catch up.
Compounding Interest And Time
Now, let’s look at how both compounding interest and time can help fatten that amount substantially.
Akila starts saving when she turns 25 and invests Rs 50,000 every year. Assuming that on this she earns a return of 10% every year, at the end of ten years, Akila has been able to accumulate Rs 8.77 lakh. Now, she stops investing 50,000 per year after 10 years and does not touch the money
she lets the Rs 8.77 lakh grow and assuming that it continues to earn a return of 10% every year,s he would have been able to accumulate around Rs 95 lakh by the time she turns 60. So the Rs 5 lakh (Rs 50,000 x 10 years) he had invested in the first ten years has grown to Rs 95 lakh: even though Akila stopped investing Rs 50,000 every year after the first ten years.
At the age of 35 Kamal starts investing Rs 50,000 every year. He invests this amount every year till he turns 60, i.e. for 25 years. Assuming he also earns a return of 10% per year on his investments. At the end Kamal would have managed to accumulate Rs 54.1 lakh.
Even after investing Rs 50,000 regularly for 25 years, Kamal has managed to accumulate Rs 54.1 lakh, which is around Rs 41 lakh less in comparison to Akila. Now Akila had invested only Rs 5 lakh over the ten years she invested. In comparison, Kamal over the 25 years has invested Rs 12.5 lakh (Rs 50,000 x 25 years).
Even by investing two-and-a-half times more than Akila, Kamal has managed to build a corpus which is 43% less. This happened because Akila started investing earlier. This allowed the money to compound for a greater period of time.
Starting earlier can make a big difference
The way compounding works is that your money compounds slowly at first but it picks up speed the longer it’s invested. So as you can see, starting earlier can make a big difference in your pocketbook for when you retire. So strongest advice is to begin investing early and set up a regular plan to invest a set amount per month.