Last week I was speaking to one of the bright kids I work with.

For practical purposes let us call him John Galt. This kid (25 years old) has just started earning 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).

Investing 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.

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  1. Excellent Input SUBRA .Rather than DHUNDING KHUSHIYA in sector No 11 By spending Rs 10 / 20 on Soft Drink and day dreaming….If the same Money is Invested in Growth Instrument (With Naren ,Prashnat ,Chirag ,Kenneth , Swati )….Dher Sari Real KHUSHIYYAN (Read Nice Retirement Corpous ) is Guranteed ! Kids Sector No 11 or Sector No 60… Say ” Though will Seek Delayed Gratification instead of Instant Happiness….Later is Shortlived ,and Fomer is Long Lived…Good Luck

  2. ” 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”

    Sir I think..may be some calculation mistakes..
    please rectify it..

  3. 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

    should be around 1.12Cr… and not 26,37,200

  4. Dear sir,
    I’ve got a question here. In the above article you quote “do not withdraw, and save it from the taxman as long as possible”.
    What if my investments (SIP/Stocks) are not giving enough return even for 3 years, i’ll have to withdraw and put this money to a deposit. From here on i’ll again start and invest in another SIP/Stock. So in that case compounding will not benefit me as much as it should have. And as i see it, same thing will happen again as no Stock/MF will be good forever. Any suggestion on this sir ?

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