A popular saying goes ‘one should save for the winter while some summer is still left.’ It is quite common for young people to postpone their savings blissfully ignoring the fact of the Fascinating effect of Compounding has on your investment. The World's greatest scientest Albert Einstein said "compound interest is the 8th Wonder of the World". There is no magic formula for this. Compounding is in simple terms, re-investment of income on the prinicipal amount. And again the income on the re-investment of income is also re-invested!!! And thus, the impact obviously will be massive and the more time your money has, the faster it multiplies.
But, the general public tend to ignore this and keep on postponing their investment. Let us take a practical example of my client.
Mr.Bharani Kanth asked :
I happy to came across to very useful and informative site.
I am able to settle in my life at the age 30. I am not able make significant investments until now. I need your suggestions in selecting good schemes in the following methods of investment.
1. I want to insure my self upto 30 Lacs using Term Plans.
2. I want to invest in Tax saving mutual funds in SIP mode.
3. Where should I invest if I get any extra money if I get for medium and long term perspectives.
4. I want to save if there is any extra money for short term investments like liquid funds.
SRIKANTH MATRUBAI advised :
Dear Bharani Kanth,
At your age of 30, you should had some kind of investment, at least Term Insurance to start with. Sure, the temptation to postpone and enjoy the money NOW is irrestible, but just see the longer vision. You could have a Wealthy Retirement.
You should start your investments as early as possible. The earlier the better. This gives you the advantage of 'compound effect', rightly described as the 8th Wonder of the World. There is no truth to statements like ‘I am too young to start saving’.
COST OF DELAY :
Do you know that if you intend to invest Rs.2000pm and delay the same by just one(1) month, you would be losing Rs.1,90,792!!!! (Calculated @20% for 25 years). And in today's worth of money, you are losing Rs.44,454. Yes, by delaying your Rs.2000 investment by 1 month, you are losing Rs.44,454 in today's worth
POWER OF TIME :
Do you know, that if you need Rs.1 Crore in say about 20 years, you need to invest Rs.7535 per month.
For the same Rs.1 crore, if you start investing 5 years earlier, you need to invest just Rs.3628 per month. A huge huge saving indeed.
You can use the following calculators ……………..
WHAT YOU SHOULD DO.......
Apart from start saving now, , of course, he should be very regular in his saving and should have a definite goal.
To begin with, Take Term Insurance to adequately cover your self. An adequate Life Cover means a Minimum of 5 years of Annual Income and normally 10 years of your Annual Income. Suppose your Annual income is 2 lakhs, you should take a Minimum of 10 lakhs Insurance Cover and if possible, increase to 20 lakhs Insurance. It feels to notice that you are more inclined towards Term Insurance which is the Cheapest way of Insuring your life.
Your idea of investing in Tax Saving Mutual funds through sip mode is a very good one and you can find the best funds to invest in my blog posts.
Where you invest your extra money you get depends whether the money if short, medium or long term.
If it is short term, it is always wise to invest in Liquid Funds.
If it is medium term, it would be prudent to invest in Debt Funds or Balanced Funds.
If it is long term, of course, Diversified Equity Funds are the best avenue.
Best of luck ,
Also visit http://equityadvise.blogspot.com