You have heard many stories about why you should start saving early. Stories like Ram started saving at age 25 and Shyam started saving at age 35…etc.
Here is another twist to the same story. When you start saving early – what is really benefiting for you is the power of ‘saving’ rather than the power of compounding. Even if you get 23% p.a. return when you are saving Rs. 5000 a month, it is not going to have a great impact on your total corpus (called Sekuence of Return risk) on your portfolio. However when you are 50 years of age a 25% return can take your corpus from Rs. 4 crores to Rs. 5 crores.
Then why should you start saving/ investing early?
there is one very important reason. That is the fact that saving more means YOU are spending less – which means you will need lesser corpus to retire. So if Ram with MORE SAVINGS reaches the ‘magical’ figure of ‘retirement corpus’ at age 54, it may take Shyam 14 more years to achieve his ‘higher’ corpus. Say Ram was targeting Rs. 4 crores for retirement..and Shyam was targeting Rs. 6 crores for retirement – Ram’s starting early helped in not only in accumulating MORE, but also in NEEDING less when he retires.
Lifestyle creep, loss of job, expenses on children – all these can dramatically reduce one’s ability to invest/ save in the future. So an early start and a simple life style will help in your corpus doing well EVEN WHEN you are not able to invest more.
The champions of early retirement like Mr. Money Moustache and the others believe in extreme frugality at the start of one’s career..and later on too so that an extremely early retirement – say in the late 30s or early 40s is a possibility.
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