Yesterday you identified where your money is spent and next we will see at how you can save money for your retirement.
You say “Retirement???, I am just 21 years old and have just started working. Why should I plan for retirement. Its decades later and I would definitely get multiple pay hikes 10 years later than what I earn today. Why can’t I start my savings then?”
The answer to that is “Power of Compounding” and it is equivalent to a magical force in the field of finance – both in terms of investments and debt. Let me explain it with an example.
Investing Rs. 1 Lakh every year for 37 years
Say you (aged 21 in 2013) got a decent job this year and you start saving exactly Rs.1,00,000 every year till your retirement (assuming you retire at the age of 58 in the year 2050) for 37 years in total. So you would have invested Rs. 37 lakhs in total and the investments returns say 8% consistently and without any risk. How much do you think you will have in your hand in the year 2051?
You could take a guess, but if you really sit down and calculate it you would find out that you would have a cool Rs. 2,19,31,595 – thats Rs. 2.19 Crores. I hear you say “What? Crores? Impossible. I just put in Rs. 37 Lakhs and crores? Really? Crores? Wow!” But it is true. That too I put in a very safe and low interest rate of 8% per year and there are ways to get better returns too. And imagine how much more you could earn if you could increase the amount invested every year.
The best part is you do not move a single muscle to earn this extra money. It is all done by your bank/investment automatically without you even thinking about it. It is like free money and its all yours.
Starting late by 1 year
Now lets say you didn’t invest the first year and started your investment from year 2 (for 36 years in total). How much would you get back? Rs. 2,02,07,032. Let me put it differently – you LOSE Rs. 17,24,563. That is the amount of money you lose because you missed the opportunity to save just Rs. 1 lakh in the first year. Thats how much that 1 lakh could have grown in 37 years.
1 lakh becomes 17 lakhs. Magical right?
Starting 10 years late
Now lets go with your idea of starting to invest after 10 years (total of 27 years). Do you really want me to show the numbers? You would not like it, but the numbers don’t lie. You would have Rs.94,33,883 only. In other words, you lose almost Rs.1.25 crores by starting a decade late.
Even if you double the money you put in you would be be losing more than Rs. 30 lakhs if you start 10 years late. Not a good idea right?
This example is pretty simple and you can try running the numbers in Excel yourself. But I have created a google docs spreadsheet which you can copy with the formula or download it. You can even change the interest rates a bit and see how much more you can earn.
So there you have it, a reason to start your investment early. Now tomorrow lets see how you can plan how much to invest and how to start it.