Compounding is a very interesting and powerful thing. It has great rewards in store for people who invest when they are young. If you invest later in life you will not be able to make use of the great “power of compounding”!
Just to give you an example…assume that there are two people. Ram and Sham.
Ram invests Rs.5000 each month for 10 years from the time he became 25.
Sham invests Rs.5000 each month for “25 years” from the time he became “35”.
Note that Ram invested Rs.5000 monthly for only 10 years. Sham invested Rs.5000 monthly for 25 years! Now, who do you think will have more money when they are 60? Think about it a little! Who do you think will have more money at age 60?
Assuming that their money grows at 15% per year, at age 60 Ram will have Rs.4.6crores!!
Sham will have Rs.1.5 crores!!
A difference of Rs.3.1 crores!! Ha!!
Think about how foolish Sham has been. When he was young and 25 years of age, he had not got married yet. His expenses were low. He had a lot of money extra each month. He would generally blow it off on parties! Later he got married. His expenses grew! He had very little money to invest. Finally at the age of 35 when he again started to have some financial control, he decided to start investing. Since his friend had stared earlier than him, he tried to make up for it but investing for 25 years. (15 years more than Ram!) However, still he ended up loosing 3.1 crore!!
Don’t be a Sham! Don’t make this mistake.
If you are wondering how this can happen, you need to understand how compounding works. Suppose you invest Rs.100 today. It grows at 15% compounded rate every year, then next year you will get Rs.115 i.e. Rs.100 + Rs.15. Why Rs.15? Rs.15 is 15% of Rs.100!
Okay so now one year is passed. You have Rs.115. The next year you will get Rs.132. Why Rs.132? Rs.115 + Rs.17. Why Rs.17 ? Because Rs.17 is 15% of Rs.115!
Now, try to use your imagination. Initially your money will grow at a slow rate. But once the money grows to a big amount the rate of growth will be very very very high! So, basically you need a lot of time to reach a very very high rate of growth. But once you reach the high growth rate then money will just start flowing! And if there is one thing the youth have, it is time!
In fact, you should invest as fast as possible. If you are not earning yet, invest your pocket money!
Just to give you an idea, if you invest Rs.1 now. You let it grow for 30 years at 15% rate, at the end of 30 years you will have Rs.67! So think of it this way. If you want a good amount of money after 30 years, invest as much money as you can invest right now. For every one rupee you invest you will have Rs.67, 30 years from now! So if you invest Rs.5000 now, you will get Rs.3,35,000 30 years from now! So what are you waiting for. Invest the money now when your expenses are low and you have the chance. You have time on your side!
I guess you probably now understand the need for investing. So, let us get right into it…