Abhay is a 35-year-old family guy, and works at a small content company in Bengaluru. He saves Rs. 10,000 every year. He started investing in mutual funds at the age of 25 and has managed to invest 10K every year, until 35 (for a total of 10 years). For family reasons, he is unable to save anymore, so this little fund grows on its own without any further investments.
Let's say that I woke up to investing at the age of 35. I’ve resolved to invest the same amount as Abhay (Rs. 10K per year). I am determined, and each year until the age of 65 (for a total of 30 years), I saved and invested this amount without any withdrawals.
If we both had exactly the same rate of return, who do you think will have more wealth at the age of 65?
The answer surprises most people. When I saw the calculation I was blown away. Abhay wins hands down. In fact, he has 3x more of what I would have at age 65, even though I saved for 30 years, while he saved only for 10 years!!
Personal finance was something I never paid attention to until recently when I started working at Scripbox.
We often do not realize that by allowing our money to follow two simple principles, we will enjoy “The Right to Prosperity”, a term coined by one of Scripbox's founders. Abhay is just one among many of our customers. They all follow these principles and are running 10 years ahead of me. But inspired to start now, I’m hoping to be 10 years ahead of many others.
These principles are —
- Early bird gets the worm, or never under-estimate the power of compounding. Your early investments matter the most in determining where you will end up.
- Understand inflation and beat it. Always. In India, it’s at 8% every year, and many instruments such as Fixed Deposits are taxed at around 30%, so your net return is 6%. Since the net return is less than inflation, you will end up saving less that your needs i.e. prices will always grow faster than your savings.
Here’s the answer to being Abhay. Start now.
- Those who need proof can play around with this simple excel sheet that we share with Scripbox customers who want to find out where they would land up. The second sheet shows what would be the value of your saved money at age 65, after accounting for inflation
- If you are new to investing, here is some simple advice: If you don’t need the money in the short term, invest it in instruments that don’t tax you at all, and are safer than stocks — diversified equity funds if you don’t need the money for 7 years, and debt funds if you don’t need the money for 3 years.