Last week I was speaking to one of the bright kids I work with. For practical purposes let us call him George Orwell. This kid (25 years old)  was born in 1984 and has just started on a nice salary. He spends well but can put away a nice amount on a regular basis, but is not doing so. I asked him why, and he had a good answer.

He hopes to start a business (perhaps) and cannot make up his mind about whether to, when to or…any of the other questions. So he has decided to keep money in the Income bucket (bank fixed deposit) rather than a growth bucket (real estate, equities). Very sensible.

Yesterday another girl around 30 years wanted a pension plan for herself. She is the wife of a very high income guy and can set aside a nice amount on a monthly basis from her income.

While saving for retirement (this is called the accumulation phase for those who did not know) success is a function of 3 important factors – starting early, investing enough, invest often, do not withdraw, and save it from the taxman as long as possible. Then of course aim for and get a reasonable rate of return. The math is pretty elementary.

And compounding worked in the past, works in the present and will work in the future! Past performance in this case is a great indicator of future returns!!  The relationship between time, amount invested, frequency of compounding,  rate of return, and the total corpus is purely mathematical! Clearly no brains are required – V = A*(1+r)^n.

It is boring, clear, mathematical and accurate. If you can control A, n and aim for a reasonable r, V is guaranteed.   The problem is that success requires discipline, and wealth creation should start early and be  given a high priority early in one’s career. There is a beautiful calculator called ‘cost of delay’ calculator. I have no clue about how to put it on the site so …not being put up! Suffice it to say if you are 23 years of age and you could save Rs. 10,000 a month, assuming a 9% p.a. you are going to have Rs. 26,37,200 LESS in your retirement account by the time you are 58 years of age. Quite expensive a delay? Is it not?
The magic of compounding rewards early starters. Delay may make it impossible to attain THE GOAL. After all like in driving – start early, drive safely and reach alive is good advice whether in driving or in investing. Do not try to make up in ‘r’ what you can do in ‘n’. It is like starting late and driving fast.

I like a new joke (black humor?) – In the race between a Yamaha and a Honda bike the winner was the Ambulance. Investment ambulances are not available!

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