I make it clear to the reluctant saver – he/she is not doing any great thing. You are just deciding to keep money in different boxes which you will open at different points in time. So it is money that you owe YOURSELF that you are now (when you are earning) keep aside so that you can get it at the appropriate time. So it is better to tag each investment to a bucket – children’s marriage, children’s education, new house, foreign trip, retirement……………etc.

In 1989 at the age of 60 Warren Buffett had a net worth of only US $ 3.7 billion. In his mid eighties his net worth was about $ 59 billion. NOW is it upwards of US $ 74 billion $….can you see what percentage was CREATED AFTER HIS AGE OF 60 YEARS? MORE THAN 96%…..THIS IS THE SHEER POWER OF COMPOUNDING. Learn to tap that.

All Retirement calculators do the same job – you put in your current expenses, and it tells you how much you need. You put in even more details and it tells you how much you need to invest to get there. Fool around a bit with the tool and you realize that if you have more time to go you need to put in a much smaller figure. This of course comes from the power of ‘n’ – the time factor.

I was curious to know how things actually pan out, and presto Pattu came out with a calculator..which helped me write this article…Let us call this girl Pooja….

Age at which you start investing 23
Take home annual salary 400000
What percentage of your take home pay would you like to invest 10%
At what rate will this contribution grow each year? 10% due to increase in salary/income
How many years do you wish to invest 37
Average rate at which investment grows 13% rate of return

these are the assumptions..and i have done a cut paste from Pattu’s calculator…

the total corpus is Rs. 8,74, 17, 293. That is an impressive figure…now the best thing is that Pooja has accumulated this amount of Rs. 8.74 crores with a CONTRIBUTION OF just Rs. 1,32,01,579 – which means the Portfolio growth has contributed Rs. 7,42,15,714. Not bad at all, right.

This means ONLY about 15% of the corpus is from contribution and the remaining 85% is from the growth of the corpus. And the table is as follows:

After 10 years the percentage is a high 52%..and obviously it keeps falling gradually – after the end of 15 years it is 40%, after 20 years it is 31%, after 25 years it is  25% and after the 30 years it is 20%…..thus in the initial stages the amount of money that you save / invest looks big…but suddenly it gets smaller and smaller.

This is the problem that the country faces – people are not too keen to invest and let it grow at a nice pace. Most people will disturb the compounding. Many others will not start at all. The following are the observations (lament?):

– most people end up chasing ‘r’ of the compounding formulae. You need to chase ‘n’.

-compounding takes time but it works for Na Mo, Warren Buffett, and for YOU.

– instead of saving 10% of your income if you saved 15% …the same results can be easily got with a lesser portfolio return

– 13% portfolio return is not easy to achieve, but not impossible either…

– 13% is not average return..it is CAGR..this will be known only when Pooja reaches age 60.

– Pooja will draw down and live till age (say) 90…that means another 30 years of compounding or a small part of the corpus

– Saving more is a far, far, far sensible than chasing a higher r.

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  1. Good illustration and example Subra sir.

    Come to think of it 1989 to 2015 is about 25 years.
    Just in straight forward compound interest calculation it means that rate of return needed to to grow $3.7b to $74b is under 13% without any further investments.


  2. One of the excellent posts – especially the contribution % in corpus. From my experience, it is the financial illiteracy of people rather than laziness, especially from IT (that’s where I work!), that works against starting early. By the time they become literate, already 10 years of earning life has passed!

  3. ‘n’ is more important than ‘r’. If this is understood, the journey towards compounding gets simpler.

    Good input by Arhant.

  4. I have found this aspect of compounding very difficult for many to understand. 15% p.a is easily understood but the fact most of the growth happens in last few years is not miss that out and you have mediocre returns.

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