Browse Tag: #compounding

I am Too young to start with investments

I am Too young to start investing

“I have just started working last year. I am too young to invest.”
“I will invest once I have sufficient money. Right now my salary could barely survive by month end”
“Investments are for the later part of life. Let me enjoy now”
“I don’t want to invest my hard earned money now, I will do it later”

I get to hear above statements from a lot of youngsters who are fresh out of College, earning handsome income and are hell bent on spending all what they earn month on month.

too young to invest

Yes, but isn’t it true? Let me enjoy my earnings. I am a fresh pass out and I have a full 40 years of professional life ahead of me. I can take up investing later.

When you delay investments, you miss out on power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

Power of Compounding

 

I agree about the power of compounding. But I do not have spare money for investments. Many young professionals will not have any money left as the expenses are on the rise.

It is all about priorities. Since we know that most of the things in this world revolves around money, we have to give a certain level of priority to investments. “Pay yourself first” is the phrase widely used by financial planners across the globe. Instead of investing the money which is leftover after incurring all the expenses in a month, invest first and manage the expenses with the leftover money.

Once you make this a habit, you will become more responsible towards your finances.

And when you start young, you can amass wealth easily as you are giving time to your investments and supplementing your investment corpus by adding certain amount month on month.

I agree. But how to manage the expenses? Inflation is high and cost of living is rising rapidly month on month. If I invest my income then from where will I get money to pay utility bills and shop for groceries?

You don’t have to invest your entire monthly income. Take out say around 20% of your after tax income and invest every month. Manage your monthly expenses with the rest 80% of your  monthly income. Make use of the tools like Excel sheets for your benefit. Budget your expenses, cut down money leaks, increase your invest-able income and invest diligently.

Why you need insurance

Ok understood. Can you simplify this for me step by step?

There is no one sure shot formula for investments. But everything works on certain simple principles

  1. Start early – this will give you sufficient time to grow your money.
    Delaying investments? It can cost you DEARLY

  2. Budget your expenses.
    Making a simple budget to improve your personal finances
    A simple budget can save you from 5 big troubles

  3. Spend less than what you earn
  4. Invest your savings through proper diversification – consistently month on month
    Why I need diversification of investment?

  5. Cover yourself for any eventuality through health insurance and life insurance
    Why you need Insurance ?

  6. Have adequate emergency fund
    What is an emergency fund? And why you should have one?

  7. Don’t get into debt trap
    Consumer Debt & personal finance

  8. Don’t indulge in buying stuff
    Financial success : It’s not about the Stuff you gather

invest now
Bottom line is – it is your own money and you only have to take care of it.

Personal finance is not a rocket science but it requires your careful attention on money matters in your day to day life.

Happy Investing !!!

Compound Interest – Let your money work for you

Don’t always work for money. Instead make money work hard for you

“Let your money work for you”

 

compound interest

 

I think we must have read / heard this saying many times in life. This is quite a famous quote often used by investment advisers. This is related to power of compounding which is very powerful tool if exploited properly.

If you are someone who wish to have good returns on your investments, wish to retire early, wish to have financial independence you need to exploit power of compounding and make it one of the pillar of your overall financial independence strategy.
I will just give a small example to reiterate the faith in this strategy. For assumption, I have taken 10% as returns on investment which is quite possible in today’s scenario.

If you save INR1,000.00 per month for 12 months, at the end of the year you will be left with INR12000.00

Year 1
You will earn 10% interest making total amount INR12,000.00+INR1,200 = INR13,200

Year 2
You will earn 10% interest on INR13,200 and total amount would be INR13,200+INR1,320=INR14,520

Year 3
You will earn 10% interest on INR14,520 and total amount would be INR14,520+INR1,452 = INR15,972

Year 4
You will earn 10% interest on INR15,972 and total amount would be INR15,972+1,597=INR17,569

Year 5
You will earn 10% interest on INR17,569 and total amount would be INR17,569+INR1,756 = INR19,325

So in 5 years, your initial investment of INR10,000 turned to INR19,325 – You have almost doubled your investment without doing anything
Now, to show the outcome of consistent investing, let’s take a scenario where you invest INR1,000 per month for 5 years that is 60 months and let’s see the result.

Year 1
You have invested INR12,000 and your total amount after 12 months stands at INR12,665

Year 2
You have invested INR24,000 so far and your total amount after 24 months stands at INR26,645

Year 3
You have invested INR36,000 so far and your total amount after 36 months stands at INR42,076

Year 4
You have invested INR48,000 so far and your total amount after 48 months stands at INR59,110

Year 5
You have invested INR60,000 so far and your total amount after 60 months stands at INR77,911

If you continue this investment for 15 years your INR1,000 per month investment becomes INR4,14,774

If you continue this investment for 25 years your 00 per month investment becomes IR13,19,273


————Here the magic unfolds ————

 

If you replace investment amount by INR5,000

If you continue this investment for 15 years your INR5,000 per month investment becomes INR20,73,872

If you continue this investment for 25 years your INR1,000 per month investment becomes INR65,96,367

So your INR5,000 per month investment for 25 years @ 10% per year will yield you INR65,96,367

This is simply a huge amount and can give you a big shot in your retirement Kitty.

You can use any compound interest calculator and tweak rate of returns and amount to see the magic. You will be surprised.

Idea is to find an avenue which gives you maximum return on investment for your risk appetite and to stay invested for a long time (>15years) to reap the benefits of compound interest. Compound interest works miracle with large sum invested for a long duration. The best part is it’s a passive income for you as your money is working for you.

Start as early as possible -> Make regular investmsnts -> Stay invested for a long duration -> Reap the benefits of Compounding

If you delay by a year, you will loose lot of money. Don’t think that you will loose only first year’s interest money if you delay by a year. You will loose interest of the final year if you delay. Do your basic math and you will come to know the losses.

No doubt great Albert Einstein has summed it up correctly

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

 

Power of Compounding

The Magical power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

I am not going to give chart of person A starting early and person B starting at later stage in life and the potential gain for person A over person B. But if you start early in life, it makes a HUGE difference.

Same is applicable to the money that you spend on material gains or for momentary gains. If you put the figures in any of the online compound interest calculator available for the money you spend in leisurely sipping cups of tea / enjoying junk food day by day, month on month, you will be astonished to know the amount of money you stand to lose over the years. The loss is two ways, one in terms of actual money you spend and other is the health you stand to lose by gulping junk food.

So gear up and use compounding as an efficient tool to maximize your gains in investments.