Jagoinvestor

September 6, 2009

Key to Excellent Financial Planning is Early Investing

Today’s article is my favorite, Today we will see that what is the biggest secret of Generating Long term Wealth.

Most of the people run after choosing great Mutual fund and choosing right policy, but they do not understand the most important element of Investment Planning, which is Early Investing.

In this article we will discuss how important is Early Investing, We will see that what you contribute early in your Life is what matters the most.

early investing

I did some Excel calculations and found out some important Rules you should remember. All the Examples in this articles assumes 12% or 15% CAGR annual return over long term (30+ yrs). Lets see some Important Ideas you should keep in Mind.

If you are reading this article in Email, you wont see important charts and graphs, make sure you visit the blog for this particular post. thanks

The amount you invest does not increase drastically when you cut your Tenure by huge Margin.

What I mean to say here is that if you have a goal of generating a fixed amount at the end of a long period like 30 yrs and If there are two cases

  • Case 1 : You invest amount A per month for 10 yrs and then let it grow for next 20 yrs .
  • Case 2 : You invest amount B per month for all 30 years .

In this case amount A will be too big compared to amount B. It would definitely be more, not by great extent. Lets take an example. If you want to generate a corpus of 2 crores in 30 yrs and you assume a return of 12% annually.

You need to invest Rs.5666 per month to achieve this target if you can invest for whole 30 yrs. But what if you want to invest only for 20 yrs or 15 yrs? In that case how much money you need to invest per month?

The answer is Rs.6065 (20 yrs) and Rs.6611 (15 yrs). So you can see that the monthly contribution required to meet the same goal does not increase drastically even if you reduce the tenure by 10 or 15 yrs. See the chart below (Click to Enlarge)

The Tenure and amount required are :

30 yrs : 5666
25 yrs : 5801
20 yrs : 6065
15 yrs : 6611
10 yrs : 7903

In the above chart you can see how “Monthly Contribution Required” increase at very small amount if you want to save the investing years later in your Life . Download this Monthly Contribution Calculator to calculate how much you need to invest monthly for your Financial Goals.

Even if you cut your Contribution at the end of the Tenure, It wont affect the final Corpus Drastically.

What this means is that If you want to invest for long term and in case you are not able to invest for many years at the end, the final amount generated will not be drastically less .. The difference will not be worth a concern.

Lets see an example, If you want to invest Rs.4000 per month for next 30 yrs (retirement amount, see 6 steps of Retirement Planning) and you assume 15% annual CAGR return, you would be able to generate a corpus would be 2.8 crores, But in case you just invest for 20 yrs and don’t invest for rest 10 yrs, in that case your corpus will still be 2.69 crores, 96% of the original amount.

If you invest for 10 yrs and don’t do anything for 20 yrs, still you will be left with 2.19 crores. You can see that how your corpus is not getting affected a lot because of laziness in investing.

If you are successful in early investing, your 90% job is done, even if you are not able to invest money in later years, your final amount will not be affected a lot.

See the chart Below (Click to Enlarge). See this Video to understand the CAGR or Annuity Calculation, Or see this Article if you are on Slow Bandwidth.


If you see the chart above, you can clearly see that in the first 15 yrs, the total corpus at the end does not decrease with great rate. Its more than 2 crores even if you miss 22 yrs (thats more than 70% of total tenure).

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Investments Done in Initial years are the main chunk of your Final Corpus

What this means is that what you in the start has major chunk in your final corpus , the money you invest at the end generally has no major contribution because the money compounding has done its work on the money you invested in the start , not end .

See the chart below . .

The time frame of this example is 30 yrs investment with assumption of 12% annual CAGR return. You can see two kind of lines here. Blue Line shows contribution of a particular year in the final corpus and Red line shows cumulative share of years till then in the final corpus.

If you see the chart and concentrate on 6th yr, you will realize that what ever you invested till 6th yrs contributes to 52% share of your Final corpus which means that if you stop at 6th year, you will still be able to make 52% of original amount.


You can also see that last 12 yrs contribution helps in 10% of final corpus, this we saw in the first chart itself.

So at the end, lets see some numerical facts which will help us understand power of early investing.

  • “Investing 1500 per month for 10 yrs and letting it grow for next 20 yrs” will generate more than “Investing 1000 per month for 30 yrs” @12% return.
  • “If your Original time frame was 30 yrs and later you want to cut your Tenure by 50% , you corpus will decrease just by 14%” @12% return .
  • A : “Investing 5000 per month for 30 yrs” B : “Investing 6,000 per month for 15 yrs and do nothing for next 15 yrs” C : “Investing 11,000 per month for just 5 yrs and do nothing for next 25 yrs” Here, C will make 1.95 crores.

If you are a young person below 25 and you have 35 yrs in your hand and want to make 5 crores, If you start right now, you will have to invest just Rs.3,400 per month, But if you are later by 10 yrs, then you will have to invest more than 15,000 per month to achieve same target.

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Conclusion

Start Early, The secret of Sound Financial Planning is Early Investing, not making excellent return or choosing great funds or buying multibagger stocks. If you can take little pain and invest more money now, then better do it, It will save you from lot of trouble later.

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Please put your comment and let me know how was the article and if you liked it? What do you think that early investing is not the most important element of Investment planning, if not, what other thing do you think is the Key 🙂

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27 Comments
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Ashok
Ashok
11 years ago

Thanks you very much Manish for sharing such eye opener article.
I have few question to ask, I am new to investment so can help how to i start a SIP & in new product should i invest long term so i can get lump sum amount at the end.
Thanks in advance

Kalyan
Kalyan
11 years ago

Very informative..Thanks very much.

Dinesh Jain
Dinesh Jain
11 years ago

Hi Manish,

I have a small query here in “Even if you cut your Contribution at the end of the Tenure , It wont affect the final Corpus Drastically “.

When i calculate Rs. 4000 investment per month for next 20 years @ 15% and thereafter i don’t invest anything, then according to you corpus is 2.69 cr but in my case its coming to 2.45 cr. I have calculated many times. can you check again from your side…

Kiran B
Kiran B
13 years ago

Manish

Kudos to you brother!

This blog rocks.

Thank you for these valuable inputs.

kamaljit ridlon
kamaljit ridlon
13 years ago

Excellent!!!!!!!! post….i was thinking i will invest less in intial year and more towards at end….but now i have to change my handset…………!!!!!!!!!!!!!!

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Manish Chauhan
Manish Chauhan
14 years ago

@Archana

There are two things

1. If its some basic advice of general questions , I would be more than happy to help .. I would be ready to answer those . .I anyways do that .

2. But, if its more than basic questions and demand more time and effort , I would suggest you to have your Financial Planning done , anywyas every indian needs it . Just having 2-3 questions answered is not going to help you anyways ..

You go through my article http://jagoinvestor.dev.diginnovators.site/2009/06/why-do-you-need-financial-planner.html

mail me at [email protected] anyways ..

Manish

Anonymous
Anonymous
14 years ago

hi manish,
i really liked your projections , very informative, please let me know if i give you my financial portfolio, will you give me your sugestions,
many thanks,
archana

Manish Chauhan
Manish Chauhan
14 years ago

@Anonymous

You should mainly look at long term investmnet in Mutual funds ..

see http://jagoinvestor.dev.diginnovators.site/2009/08/list-of-best-equity-diversified-mutual.html to find some good mutual funds for you .

See this video to understand CAGR : http://jagoinvestor.dev.diginnovators.site/2009/05/video-post-on-basic-formula.html

CAGR is something we calculate after we get returns , its not something guaranteed .

So if you invest 100 somehere and get 200 in 4 yrs , you say that your CAGR was 18.92% . In general you can expect 12%+ CAGR from mutual funds in long term ..

Manish

Anonymous
Anonymous
14 years ago

hi manish i am happy to read this article.i am in the right stage that you have mentioned i.e. i am 25 yrs just started my career with 15000 a mth,now i am planning to save around 2000 a mth,i would like to invest in mutual funds with sip options where i can have discipline for long term .so i would like you to clarify me on
1)names of funds that will suit my requirement.
2)so if i start today by investing 2000 p/mth regularly for 1 yr and if i get a return of 12% p/a,then should i reinvest the 12% return that i earn upon 24000 that i invest in the same fund at the end of the yr or how does the cagr concept work .
can you give an detailed example for the above amounts please.it will be of great help for me to understand the cagr.

Manish Chauhan
Manish Chauhan
14 years ago

@Aditya

Thanks for the words .. you need to reframe your question as i was not able to understand it ..

@yogesh

thanks . I would write some post on it sometime .. keep bugging me on it ..

However , I would let you know in short about your doubt ..

So for a person in 35-40 age range , its like taking moderate risk in general .. It all depends on your current situation also . The general plan has to be like everyone else .. but the figures and choice of funds would change based on your Risk appetite and other factors . Not sure how to explain ..

Manish

yogesh
yogesh
14 years ago

Early bird catches the warmth! You have narrated how powerful is early investment in most simple way possible! Hope this article reaches as much youngsters as possible. As you know many of us would not have had oppurtunity to understand these facts at our early age. Can you please give us investment plans for the people in age group of 35 to 40 years.

Anonymous
Anonymous
14 years ago

excellent article manish! am an ardent follower of your blog, and keep investing shares whenever there are dips (am always a long timer). could you post a few lines on the risk factor, as these regular investments are into equities. This brings the same question of 'what if' after investring for 10, 20 or 30 yrs, the stock markets were to crash or witness extreme swings? what would the impact be on all these years of investments?

thanks,
Aditya

Manish Chauhan
Manish Chauhan
14 years ago

@swaroop

I was talking about Equity only .. Equity has the best chances of returning 12-15% in long term .. Even Real estate does not return that kind of return over long (dont consider short term).

Manish

Anonymous
Anonymous
14 years ago

Hi Manish,

Nice article. But tell me where else other than stocks or mutual funds do you get a CAGR of 15% or 12%? When you say investing some amount every month, where do I invest ?

Swaroop.

Manish Chauhan
Manish Chauhan
14 years ago

@Puneet

You are right that "when to sell" is more important question and the answer is not that simple which can be explanied in 2-3 lines .. Its more of an art and takes time to learn ..

Manish

Puneet
Puneet
14 years ago

Good write up! keep it up dude.
Everyone talks about when to invest..how to invest.
What i ask is…when to exit your investments? how to judge the right time..any clue?

http://spinelessinvestors.blogspot.com/

Manish Chauhan
Manish Chauhan
14 years ago

@Sandeep

Thanks .. nice to know that you read this when you really wanted it 🙂

@Abhiskek

Thanks ,Nice to hear from you . where are you now a days ?

Manish