Importance of Early Investing and benefits of Compounding

Suresh understands the importance of investing early and benefits of compounding. He spends less money on entertainment and makes sure that he is investing Rs. 50,000 every year. Suresh gets 10% return on his investment every year. At the end of 10 years, the accumulated amount is Rs. 7.96 lakh. However, due to some financial responsibilities in his family, Suresh is unable to save money now and whatever he salary is used for household expenses.

He doesn’t touch the accumulated amount. He keeps the amount (Rs. 7.96 lakh) as a fixed deposit in a bank at 10% interest rate till he gets retired at the age of 65. Suresh does not make any fresh investment. The interest keeps on accumulating on Rs. 7.96 lakh till 35 years. Thus, when at the age of 65 years, he gets Rs. 2.23 crore.

Case 2 (Mahesh)

Mahesh spends a lot of money and doesn’t believe in investing early. He starts investing after 15 years when he is 35 years old and invests for next 30 years. He regularly invests Rs. 50,000 each year till he is 65 years old.

Mahesh also gets a return of 10% per year. At the age of 65, he gets a maturity amount of Rs. 82.24 lakh.

Suresh invests regularly for only 10 years but, Mahesh invests regularly for 30 years, 20 years more than Suresh. However, Mahesh gets Rs. 1.41 crore less than Suresh. This is almost 63% less. Therefore, it is important to invest early to get the benefit of compounding.

When we invest early in our lives, the amount keeps growing at a specific interest rate. At the time of maturity, it becomes a big chunk. This is because the growth in amount every year is a lot more, compared to the initial years.

Moral of the story

• Start investing early
• Don’t touch the amount for a long time