Why you should Start saving early?
Why you should Start saving early?
We all understand that although there is no glory attached to the phrase ‘Save money’, we must form a habit of saving money. The challenge is not to understand that saving is good, but rather knowing why it is good. So lets dive into it straightaway and understand the why of saving money.
Earlier the better
We all start saving at one point in our lives or another, to meet our family needs/wants and to have cash when an unexpected situation shows up unexpectedly. Saved cash means to enjoy the luxury of a financial buffer and to know that should a situation arise we would be well prepared to handle it. We could even go as far as to say that Savings are synonymous with mental peace, wellbeing and most importantly freedom. If you think you are free; try holidaying in Goa without Cash. You get the point. So, obviously saving money can be the difference between a peaceful life and a troubled one (other factors remaining the same) but the problem is, too many of us start saving too late and furthermore we don’t allow our savings to grow. So the obvious questions that arise are How late is too late? And how do we make our savings grow?
You may not like the answer a lot but one should really start saving right after they’re born. However, most of us were not able to start so early (for obvious reasons) and here we are, reading this article. But what we can do is use this knowledge to start saving for our young ones and also for ourselves (better late than never!). So now that we’ve established the ideal age to start saving we must now understand how to make our money grow. To understand this, we must understand the Power of Compound Interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
What did the great scientist mean when he made this remark? We’ll consider two possibilities: 1) We start saving with a given amount and leave it as it is without adding more money to it on regular intervals. 2) We add a certain sum every month to our kitty.
Assuming that you have a new-born and you decide to save just Rs. 21,000. That’s it, no big deal and you decide to keep the money in the bank or invest in NIFTY index fund (Note on Index fund) we come up with the following results at different intervals of time:
Asset class At Age 1 At Age 10 At age 20 At Age 40 At Age 60 Total
Bank (8.5%) ₹21,000.00 ₹47,480.65 ₹107,352.97 ₹548,793.33 ₹2,805,456.80 28 Lac
NIFTY fund(18%) ₹21,000.00 ₹109,910.55 ₹575,253.73 ₹15,757,945.2 ₹431,657,939.29 43.1 Cr
After inflation (5%) ₹39,241,630.84 3.9 Cr.
Keep ₹21,000.00 in the bank you’ll end up with 28 Lacs (without taxes) in about 60 years and invest the amount in a NIFTY Index fund and the results is a staggering sum of 43.1 Cr. Now that is the power of compounding. Of Course, some of our more financially savvy readers might say ‘surely the inflation will rise in the same period too’, which is absolutely true. So after considering an average inflation rate of 5% we’ll be left with a respectable 3.9 Cr. Meaning that your child will be able to do as much as you can with 3.9 Cr today!
The reason why you should start saving as early as possible is that you have more time for compounding to take place. In short, the way compounding works is that for every year interest is calculated on (Principal+interest) of previous year, as opposed to Simple Interest wherein the interest is calculated year after year on the same Principal. So, the more time you have the more your money will grow, without effort. Some people will have obvious qualms with this method of creating wealth, which is that they’d have to wait 60 years but frankly speaking, all you invested was 21,000, that’s it!! And Of course you don’t have to keep it all the way till your turn sixty years old. What and how you want manage your money is your choice. You have the way. Furthermore, for those of you for whom 3.9 Cr might not be a very impressive sum and would rather prefer 39 Cr, then you can simply make the investment of 2,100,00 (2.1 Lac) initially.
₹ 2000/month 10 years 20 years 40 years 60 years Total Inflation adjusted
Bank (8.5%) 376,276.83 1,253,997.4 8,077,304.5 45,204,571.8 4.5 Cr 22 Lac
NIFTY Fund 662,576.38 4,617,708.7 169,159,672.5 6,032,253,120.7 603.2 Cr 30.22 Cr
Now, lets look at the other way to go about saving and growing money, which is through SIP (Systematic Investment Plan). SIP entails that we invest a certain sum every month for a given period of time. We’re assuming that we have chosen to invest ₹ 2000/month in a NIFTY index fund. The compounding of money as it happens over regular intervals is shown in the table below.
Without inflation you end up with a mind boggling 603.2 Cr, which after inflation adjustment is ‘only’ 30.22 Cr. If this doesn’t convince you that saving early is a ‘Prudent’ decision, I am sure nothing else will. Just by investing as little as ₹2000/month you can amass extraordinary amount of wealth. Again, you may not want to wait 60 years to enjoy the fruits of compound interest and you may withdraw money at given intervals depending on your needs but it is absolutely essential that you begin investing TODAY !! And encourage your children to do so as well. Fervently do I wish sometimes that I myself had known this when I was old enough to count, but I still consider myself very lucky even now because its never too late.
If you’re interested in learning more about Index Funds and How to begin investing, and planning your financial future, Please attend our Financial Literacy Awareness Program (FLAP) at IIC, Lodhi. The FLAP is FREE of cost and is a part of our campaign to spread Financial Literacy to the masses. You can either Call 9990237879 or visit our website at http://eifs.in/ to get more information.
Thank you for reading.