The advantage of investing early (Indian Share Market)

The advantage of investing early (Indian Share Market)

When asked to name the greatest invention in human history, Albert Einstein, one of the most influential and best known scientist and intellectual of all time replied "compound interest". Let's try to understand what he said with a very simple example:

Jerry starts saving when he turned 25 and invests Rs 50,000 every year. He earns a return of 10% every year.At the end of ten years; he has been able to accumulate Rs 8.77 lakh. After that, due to financial constraints, he couldn't invest Rs 50,000 anymore. But at the same time, he does not touch the money that he has already accumulated, hoping to live of it when he retires. At 60, when he retires, he would have accumulated around Rs 95 lakhs (assuming a return of 10% every year).

Tom, had fun and lived his first few years spending on all kinds of things and did not think ofinvesting regularly. At 35, he starts to invest Rs 50,000 regularly every year until he retires at 60. I.e. for 25 years. Assuming that he also earns a return of 10% per year on his investments, he would have managed to accumulate only Rs 54.1 lakhs which is around Rs 41 lakhs less in comparison to Jerry.

5 simple points spell out from this story:

Even byinvesting two-and-a-half times more than Jerry,Tom has managed to build a corpus which is 43% less!

Why? Because,Jerry's Rs 5 lakhs was allowed to compound for a longer period of time than Tom's.

As the fund grows, the impact of compounding is greater.Jerry starts at 25, accumulates 50,000 for ten years, stops at 35 and then, his 8.77 lakhs (5 lakhs + Interest) is allowed to compound for 25 years till he's 60. Whereas Tom starts at 35 and invests Rs 50,000 for the next 25 years, accumulates 12.5 lakhs (50,000 x 25) only to get 54.1 lakhs at 60.

Now let's assume that Jerry had allowed the fund to compound for only 20 years i.e. Till he turned 55. At 10% return every year, he would have accumulated an amount of around Rs 59 lakhs. By choosing to let his investment run for 5 more years, he accumulates Rs 45 lakh more.

Essentially, compounding is the idea that you canmake money on the moneyyou've already earned.

Hope you got my message.Compounding is very powerful.To take advantage of it, you have to startinvesting as early as possible.The earlier you start, the better it gets.

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