Compounding is also one of the reasons why you must invest as early in your life as possible, even if the amount that you are planning to invest is small.
SIP (Systematic Investment Plan) is the best way to achieve the same too.
My father was very keen on us starting to invest with our first income and so I started investing Rs. 5,000 per annum at the age of 25 and continued to invest till I was 30. I was investing this money for a long term horizon. Majorly for my retirement, so I have decided that I shall not touch the money until I retire i.e. at the age of 65. Given that I have invested in equity mutual funds where the expected return is generally 15%.
I should make approximately 45 lakhs at the end of retirement.
Whereas, My friend Priya did not start investing until she was 31. but she continued to invest till she retired at the age of 65. Again she was looking at 30 years of investments and invested in equity mutual funds, earning 15% return.
Priya will also make 44 lakhs at the end of the retirement.
At the time of retirement, both of us will make approximately 45 lakhs. However, whose method of investing is better?
In the above case,
I have invested only Rs. 25,000 (Rs. 5,000 per annum for 5 years) and Priya has invested Rs. 1.75 lakhs (Rs. 5,000 for 35 years)
Isn’t it obvious that my method of investing is far better than that of Priya?
Priya had to invest seven times the amount I had invested, just for starting five years later than me.
Even then, Priya earns a lakh lesser than me.
|Maturity Date||At age 65||At age 65|
|Maturity Amount||45 Lakhs||44 Lakhs|
|Total Amount Invested||25,000||1,75,000|
|Invested for||5 years||35 years|
Amazing isn’t it?
That is the power of compounding taking effect for the investor who started early.
And this is why you should start your SIP at the earliest. If you keep waiting to develop enough money or grow older, you will miss out on your opportunities.