Power of compounding
power of compounding and starting investment early can be well expresed by the following story...
Jack and Jill were twins, and both got their first job at the age of 20. Both wished plenty from their life and started splurging on expensive luxuries. Jack deferred his decision for an investment account for the time being. Jill, however, acted on her father’s advice and started saving a token amount of Rs 1,000 per month (cumulative amount Rs 12,000 per year) in a diversified mutual fund. The next 10 years were fun for both, as they were living life to the fullest. Jack never started his investment account and Jill never cared to increase her investments from the meager Rs 12,000 per annum.
Accumulation phase
Ten years later, it was time to take stock. Jack, obviously, had nothing to show. Jill’s investment, on the other hand, had returned at the rate of 15% pa and her total investment of Rs 1,20,000 (Rs 12000 x 10 years) has grown to Rs 2,43,645.
Jill was not impressed with the amount at all. She decided to discontinue her investment plan. She, however, decided to leave her accumulated investment alone in the same fund.
Jack, on the other hand, decided it was time to start investing. He opened an account with the same diversified mutual fund Jill was investing in and started contributing Rs 12,000 pa.
After 30 years, it was time for both Jack and Jill to retire.
Jill had never touched her corpus, but she hadn’t bothered to put in fresh money either. This meant her invested corpus still stood at Rs 1,20,000. Jack, on his part, had invested Rs 3,60,000 (Rs 12,000 x 30) over three decades.
Both had got an annual return of 15% on their investments.
Interestingly, at the end of 30 years, Jack had accumulated Rs 52.16 lakh, while Jill, who had saved for only 10 years, had Rs 1.06 crore. Retirement phase
The accumulation phase was over now and both were in the retirement phase.
Both wished to play safe and shifted their corpuses to investment accounts that were less risky, but offered an assured return of 9% pa.
Both assumed they would live till 100. They would withdraw a level amount at the beginning of every year for the next 40 years to meet their expenses such that, assuming both survived till 100, nothing would be left for their successors.
Calculations threw up even more shocking figures. Though Jill started with 100% more retirement corpus compared with Jack, she could actually withdraw a sum of Rs 13.75 lakh pa, which was 300% more than what Jack could (Rs 4.44 lakh pa).
Summing up from the age of 60 till 100, Jill would have withdrawn Rs 5.50 crore (13.75 lakh x 40 years), while Jack would have taken only Rs 1.77 crore (4.44 lakh x 40 years).
Analysis:
Early investments pay you more.
Even it is a small amount start saving as earlier as possible.
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