Power of Compounding and Early Investing

This post talks about the importance of Investing early in life and do not get late at all. Also it shows how powerful compound interest and regular investing is. When we invest early in our lives, the amount keeps growing and when it becomes a big chunk, the growth in amount every year is a lot more, compared to initial years .

For Example: Suppose you start in 2008 and want to save for retirement and If regularly invest 1 lacs every year at 15% return per Annam , the investment will be Rs 4.35 Crores in 2038 , but if you do late for 2 years and start in 2010 , it will be Rs 3.27 Crores only by 2038 , that will leave you with Rs 1.08 Crore less money.

Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lacs. This 58 Lacks is nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you don’t get benefit of compounding.

Below is the table of how Rs 1 lac will grow with different interest rates and different time lines.

(click to enlarge the file)

Lets see two Case studies and there results of early investing:

CASE STUDY 1

Robert and Ajay start career same time at age 23

Case 1 (Ajay) :

- Understand the importance of investing Early, enjoys some time and then …

- Start investing early (at 25) and invests Rs 50,000 every year.

- Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year. (This is annuity , don’t confuse with Compound interest )

- Stops after that and doesn’t invest extra money till he is 65 , he just leaves that 7.97 lacks in investment and that keeps growing.

- when he is 65 , he has Rs 1 Crore 40 Lacs

Case 2 (Robert):

- Spends a lot and doesn’t believe in investing early, and when he is 35 he starts investing for next 30 years he regularly invests 50,000 till he is 65.

- Assuming the same return of 10% per year.

- He has only 82.2 lacs

Even after saving for extra 20 years Robert has 43% less than Ajay .
Total amount after n years with A amount every year at i .

return=A *[(1+i)^n-1]/i

Ref : http://en.wikipedia.org/wiki/Annuity_(finance_theory)

CASE STUDY 2

After 100 years : Robert from Robertsganj and Ajay from Haryana (rebirth) , This time Robert is extra smart and Ajay is a Software Engineer.

Both are 25 and want to retire at 60 , both earn good money … (both can invest 1 lac per/year) … assuming return at 12% per/Annam …

Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money grows to good amount and he just keep that money invested till he retires …, he can invest for another 20 years also but now he spends all this 1 lac for travelling and enjoying his life every year …

Case 2 : Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts after 5 years , he thinks lets enjoy some years .

Case 2.1 : After 5 yrs he starts investing 1 lac every year for next 5 year … He sees that Robert has stopped investing now and enjoying now, so he also does same , stops investing and leaves his money invested which is growing …

Case 2.2 : After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement, he wants to have more money than Robert at the end.

Results at 12% return

Case 2.1 : Ajay get how much ??
- 66 lacs

Case 2.2 Ajay gets ??
- 1.64 crore

And what about Robert? investing 10 yrs and stopping after that and enjoying for next 20 years

- 1.72 crores !!

I would be happy to read your comments or disagreement on any topic. Please leave a comment.