Last fortnight’s column touched a raw nerve and generated a lot of reader interest. I had several young and not-so-young people writing to me and challenging some or all of the arguments put across in the article. The article itself had a limited purpose — to introduce investment thinking among young people.
During my talks at corporates and colleges, I come across quite a few young folks with the YOLO approach to life — You Only Live Once and therefore let me enjoy life in the here and now. While such an approach does have advantages, there are clear financial downsides to this thought process.
The good life
Let us consider two young folks who have graduated recently and joined their first job. We will call them YOLO Yogesh and Plan Priya.
Yogesh is your stereotypical YOLO youngster. He spends his money as soon as the salary hits the account. He owns several nice-to-have toys, all bought on EMI. To his credit, Yogesh understands the importance of saving and investing. He decides to enjoy his twenties by living the good life. He intends to invest ₹20,000 per month starting from his 31st year, all the way till his 50th year. Let us assume that Yogesh manages to compound his investments at a rate of 15% per annum.
Plan Priya has this rare ability to defer short-term gratification in order to achieve her long-term goals. She starts investing ₹10,000 per month right from her 21st birthday. Let us assume that Priya compounds her money at 15% per annum, just like Yogesh. After 10 years, she stops investing anymore (she continues to nurture the investments that she had already made) and spends her surplus on international vacations.
One year she went with her family to Machu Picchu. Another year, she climbs the summit of Mt. Kilimanjaro in Tanzania. Then, it is on to the Great Barrier Reef in Australia and so on. She is planning her bucket list and ticking them off, one by one.
YOLO Yogesh’s fun life sort of plateaus by his early thirties. He gets more responsible and starts investing ₹20,000 every month, all the way till his 50th year. Over time, he has become more like Plan Priya, by deferring his short-term gratification and becoming a steady investor. Interestingly, over time, Plan Priya has grown adventurous with her surplus cash and time.
Now, here are a couple of quick questions for you. Who do you think is having the most fun on a sustained basis?
Priya manages to invest a total of ₹1,00,000 over 10 years, which she continues to compound till her 50th birthday. Yogesh manages to invest ₹4,00,000 over a period of 20 years, starting from his 31st birthday. By the time they are 50 years old, who do you think has the most money?
Surprise, surprise, it is Plan Priya who wins the money race, despite investing only 25% of what Yogesh had invested. Can you guess why?
Send your answers and insights to money-thoughts@money-wizards.com.
The writer is an alumnus of IIM Bangalore and co-founder, Money Wizards. chari.venkatesh@gmail.com
