If I had not called this blog Subramoney, I could have called it compounding. After all I talk more about compounding than about anything else, do I not? So like all of you I first heard of compounding when I was in class 7, but the way it is taught to us, we do not think it is so important. Right? We just learn it like ratio proportion, percentage….and compounding. I wish it was taught better with examples and all the compounding stories in the world.

Of course compounding is important and all those ‘ever upward’ pointing graphs are nice to see. However what do you really need to do to create wealth – and a little faster than what you see in a compounding table?

Good old FRUGALITY. Saving more.

Suppose you save (and invest) Rs. 100,000 a year. That is about Rs. 8500 a month Sip…and you earn 12% return in one year, at the end of the year you will have Rs. 112,000. Not bad. However if you got 20% return you will have Rs. 120,000. Even better.

At the beginning of your career, or after you meet some stupid Investment professional, you might harbor ideas of getting 20% pa returns for tne next 30 years, but as you age you know this is not possible. You know that a 20% year will be followed by a 2% year and in the long run you will catch up with 11% return.

Instead of this, if you can increase the amount invested to Rs. 110,000 a year look at what impact it has on the total amount you have at the end of the compounding period – say 30 years. I am sure you know how to find a compounding calculator to do this calculation. Even better if you can do a sip and step it up every year by a small 5% or even better by 10%, the impact is far more dramatic. A 10% jump every year for 30 years is likely to lead to a 300% increase in the final corpus.

The impact of “A” and “n” – i.e. the amount that you invest, and the time that you stay invested are far, far more important than the ‘return’ that you get. However when we meet our adviser the ONLY question that we ask is “kitna milega”. Most of the people I meet – including qualified ones like doctors – have no clue what returns they are getting in their existing investments. They have no clue what they are investing, where they are investing, and how much they can really invest.

When I see wealthy people – I normally see the following patterns –

a) inherited wealth – most of these people know all the wealth creation habits – frugality, equity investing, spending far far below their income, and compounding their wealth.

b) frugality – and the money getting invested well.

c) ESOP – almost being forced to buy the shares and unknowingly creating wealth.

These are the main reasons/ steps how people create big wealth. Other than this of course there are those people who earn amazingly well – like Amitabh, Kohli, Dhoni types who can create amazing wealth in one generation itself. Yes these people could have net worth in ‘000s of crores. We do find some such equity investors too – Rakesh Jhunjhunwala for example. However these people are outliers.

Yes there are some fund managers, some CEOs with esop etc. who have created an amazing amount of wealth too – again outliers.

If you are an ordinary person, saving more and investing smartly are the ONLY 2 ways to create wealth for your family.

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  1. First you need to understand that compounding does not work in equity. You but at price A and sell at price B after time T. That’s it. It is not guaranteed that B will be higher for higher value of T.

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