BUSINESS

Let the power of compounding serve you

Often, a question comes to me from a client, viewer or reader. ‘When should I start investing for retirement?’ My answer is, ‘The day you earned your first income. The day we start working.’ If you experienced your first day of work, it also means that some day you would retire. On retirement, we all will need a ‘money’ tree that will feed us when our income stops.

Sowing a seed

Anyone who has ever sowed a seed will know that all seeds do not blossom. Many fail to germinate. Out of the few that survive, not all go on to become large trees.

Some will die after a few weeks, or months. In some cases, there could be external factors such as adverse weather conditions, an animal eating away the leaves and the like. This can be compared with our savings that may suddenly get wiped out on account of contingencies such as income loss due to an adverse economy or health-related spending.

Sometimes, our investment decisions go wrong. For example, we may end up investing in an instrument that fails to deliver returns. Take the example of a mutual fund scheme where investment decisions by the fund manager go wrong; by the time they get rectified, it is possibly be too late.If we have invested in such schemes, we may miss out on adding to our savings.

However, if these things happen at the beginning of our career, we would have the time to rectify them.

What happens to an individual who has to face such a situation with his retirement corpus? The bigger the tree, better it is.

The larger the tree, the more the shade, flowers, and fruits; and the stronger it will be as it will be deep rooted. It takes time for a sapling to grow into a large tree. The more the time the tree gets, the bigger it will grow. Therefore, the sooner we start our retirement planning, the better it is for us.

Let us try and understand the above concept with the aid of a simple numbers table, as above.

Length of time matters

If we notice here, those who start off early go on to create a much larger corpus than those who begin late. What counts is not the rate of return but how long we keep investing.

While calculating compound interest, what is important is ‘n’ i.e. the number of years we keep investing and not ‘r’ i.e. the rate of return.

Albert Einstein is said to have termed compounding the eighth wonder of the world. The longer the tenure, greater the compounding. Investment is a habit. So, develop that habit in early stage of life.

Let us also consider this concept from the perspective of different stages of life. At a younger age, generally, there are fewer responsibilities. Chances are that there are no dependents. Parents could still be working or independently generating income. An individual could be living with his/her parents and hence, there would be nil-to-less household expenses. They may not also experience the need to purchase a house independently.

In such situation, it is easier to save. As an individual grows in life, parents may become dependent, one’s own family would need support, a house purchase may be necessary, and the like.

(The author is a financial planner and the author of Yogic Wealth)

Einstein is said to have termed compounding the eighth wonder of the world. The longer the tenure, the greater the compounding. Start investing early in life