Compounding investment earnings can turn your small investments into a whopping sum after a period. The best way to take advantage of compounding is to start saving and investing wisely as early as possible.
Sachin Tendulkar started playing cricket at the age of 16. At 29, he has already amassed over 12,000 runs in one-day matches. On the other hand, Robin Singh joined the Indian team at the age of 25 and has retired now. He could manage only 2,336 runs in one-day matches. Before you begin to wonder if we have lost our marbles, let us tell you what we are trying to arrive at here. The idea is simple: the earlier you start investing, the more likely it is that you would end up making more money. While runs scored in cricket don’t multiply automatically, investment does. Surprised? Well, the fundamental principle of compounding helps you realise this.
For most young men and women starting out on your first job, the common goals most finance guys talk about – retirement, children’s education, etc. are only a vague thought too far away to worry about.
To you, I propose a simpler challenge: Save Up One Lakh Rupees.
Why one Lakh- besides the fact that it has a nice ring to it?
Because it’s a lot of money and here’re a few things you can do with One Lakh.
- It’s your emergency fund – 3-4 months of your salary
- The on-road price of a good bike
- The price of an awesome pair of diamond earrings
- Two times the cost of a three nights holiday in Singapore
- An expensive watch for your dad or jewellery for your mom – or both
And, here’s how you get from Zero to One Lakh – in just 18 months:
- Year 1: Save Rs. 5000 per month and invest in low-risk debt funds or a boring old Recurring Deposit. By the end of the year, you would have reached 2/3rd of your goal.
- Year 2: Increase your savings by 10% and keep investing in the same Liquid Fund or Recurring Deposit for another six months
In just eighteen months you would have reached Rs. 1,00,000.
(assumes a return of 8.5% per annum. You might get a slightly lower return, and it might take you a month longer – no more.)