Every financial guru would vouch by the “Start Early” rule because of the compounding power which we already discussed. But the message will be more powerful if you look at the following graph. It shows the effect of investing ₹ 5000/- a month and stepping it up by 5% every year, assuming 10% rate of return and inflation rate of 3%.
If you start investing at the age of 20, you would have accumulated ₹ 5 Crores at the age of 60. If you start at the age of 30, you will have around ₹ 2 Crores and if you start at the age of 50, you will only have ₹ 12 Lakhs at the age of 60.
Looking at it in a different way, to accumulate a retirement corpus of ₹ 5 Crores at the age of 60, you need to invest ₹ 15,000 per month when you start at the age of 30. And the monthly amount increases to ₹ 50,000 if you start at 40 and a whooping ₹ 2 Lakhs per month if you start at 50.
“Step Up” – Increase the investment by a percentage every year (for ease of demonstration – I have chosen a fixed percentage increase every year).
Previous graph shows the effect of investing ₹ 5000/- a month and stepping it up by 5% every year, assuming 10% rate of return and inflation rate of 3%. Let us try changing a couple of values and see the impact:
The following table shows the effect of investing in High-risk, High-return instruments like Mutual Funds, Shares and holding them long enough to absorb fluctuations:
| Investment Period | Starting Annual Investment | Step-up Percentage | Rate of Return | Total Invested Amount | Final Value of Portfolio | 3% Inflation adjusted value |
| 40 | ₹ 60,000 | 0% | 12% | ₹ 24,00,000 | ₹ 5,15,48,543 | ₹ 1,53,42,290 |
| 40 | ₹ 60,000 | 5% | 12% | ₹ 72,47,986 | ₹ 8,25,70,542 | ₹ 2,45,75,305 |
| 40 | ₹ 60,000 | 10% | 12% | ₹ 2,65,55,553 | ₹ 16,05,80,162 | ₹ 4,77,93,153 |
| 40 | ₹ 60,000 | 15% | 12% | ₹ 10,67,45,418 | ₹ 39,15,80,170 | ₹ 11,65,45,223 |
The following table shows the effect of Investing in low-risk low-return instruments like PPF, Fixed Deposits etc.
| Investment Period | Starting Annual Investment | Step-up Percentage | Rate of Return | Total Invested Amount | Final Value of Portfolio | 3% Inflation adjusted value |
| 40 | ₹ 60,000 | 0% | 7% | ₹ 24,00,000 | ₹ 1,28,16,574 | ₹ 38,14,571 |
| 40 | ₹ 60,000 | 5% | 7% | ₹ 72,47,986 | ₹ 2,54,69,646 | ₹ 75,80,480 |
| 40 | ₹ 60,000 | 10% | 7% | ₹ 2,65,55,553 | ₹ 6,48,09,467 | ₹ 1,92,89,112 |
| 40 | ₹ 60,000 | 15% | 7% | ₹ 10,67,45,418 | ₹ 20,29,43,493 | ₹ 6,04,01,666 |
The following table show the effect of treating Savings Account as your investment instrument – which you wont! But just using it to demonstrate the “Negative Power of Inflation”!
| Investment Period | Starting Annual Investment | Step-up Percentage | Rate of Return | Total Invested Amount | Final Value of Portfolio | 3% Inflation adjusted value |
| 40 | ₹ 60,000 | 0% | 3% | ₹ 24,00,000 | ₹ 46,59,798 | ₹ 13,86,886 |
| 40 | ₹ 60,000 | 5% | 3% | ₹ 72,47,986 | ₹ 1,16,73,868 | ₹ 34,74,470 |
| 40 | ₹ 60,000 | 10% | 3% | ₹ 2,65,55,553 | ₹ 3,70,77,544 | ₹ 1,10,35,315 |
| 40 | ₹ 60,000 | 15% | 3% | ₹ 10,67,45,418 | ₹ 13,62,69,777 | ₹ 4,05,57,701 |
Remember that start early does not mean you have to take risks and try and maximize the returns. Choose the instrument based on your current situation, future financial goals and risk appetite. Each of us have to find the portfolio mix that works best for us – money growing without making us lose our sleep! Also remember that it is not that you have to pick and choose one. Spread your investments across low-risk, medium-risk and high-risk based on your short-term, medium-term and long-term financial goals. Though not mentioned in the title, “Diversify“.
Attaching a free downloadable “Investment Calculator” for you to try out and see the impact of each of these value. Hope this excel helps you in excelling in your investment choices!
#InvestmentCalculator #StartEarly #StepUp #HighRiskHighReward #NegativePowerOfInflation #PowerOfCompounding
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Decoding Personal Finance’ Pearls of Wisdom | Milyin
Decoding Personal Finance’ Pearls of Wisdom