Early Investor - Smart Investor

You are 25 and want to retire at the age of 60 that is after 35 yrs. You earn anything more than 10k+ and can save at least 2k per month for investing. Rs 2000 per month is not bad yeah !!!

May be You are earning 30k or 60k or 100K whatever, but I am considering an average urban Indian who is earning between 10k to 15k and can save at least 2k per month.

Now What would you like to do ? I will give you two choices.

Choice 1: Start now and invest total of 8.4 Lacs (8,40,000) distributed in a span of 35 yrs (till your retirement).
That is Rs 2000 /- per month from now (from 25 years till your retirement age of 60 years).

Choice 2 : Or start after 15 yrs (Your age will be 40 Years at that time), when your salary is increased substantially and you have good money, then Invest 72 Lacs (72,00,000) in a span of 20. That is Rs 30,000 /- per month. Very big amount right, that's why I told your salary has to be substantially increased.

In Choice 1: you will have to invest 2,000 per month for 35 yrs (Till you attain age 60), so your investment total will be:

2000 * 12 * 35 = 8,40,000 (8.4 Lacs)

In Choice 2: You invest 30,000 per month for 20 yrs (Your current age is 40) (Till you attain age 60), so your investment total will be:

30000 * 12 * 20 = 72,00,000 (72 Lacs)

In choice 1 you pay less than 12% of what you pay in choice 2. 8 Lacs is very small amount when compared with 72 Lacs. I am sure that you must have got a hint by now that which choice will lead you to generate more money, But it has to have some assumptions as You may be wrong sometimes.

Choice 1: You are investing for 35 years. What is the return we should expect in this case? In last 29 yrs of Sensex history (BSE), Indian Equities have returned 17.5%. So we will expect same return of 17.5% but I am expecting it to be much more.

Choice 2: In this case you are investing for 20 years. We can easily expect close to 15% returns in this case.

Lets reveal the secret and see the MAGIC numbers now.
Choice 1: You pay Rs 2000 per month for 35 yrs @17.5% CAGR, total amount you will receive at the end:

5.9 Crores

Choice 2: You pay 30000 per month for 20 yrs @15% CAGR, total amount you will receive at the end:

4.5 Crores

Now , What is the Learning ?
As after every article I sent their has to be some learning otherwise it is of no use. You can simply delete the mails that you receive from me.

This article is for people who think they don't earn much money to invest (Few of them are in this Mailing List ). There are many who earn 7k or 8k per month and there are many who earn 40k or 50k per month. People who earn less often think what can an investment of mere Rs 1000 per month do. They fail to see what will happen in long term. They do not appreciate power of compounding.

Wealth is generated by people who invest smartly and with discipline, not who just earn lots of money.

Where to invest?

It is left up to your conscious decision where to invest. I am not an expert in suggesting where to invest. But we don’t require Warren Buffet to tell us that Equity outperforms every other asset class in long run and also they are nearly risk free for a span to 25 years.

When I say that if you invest P rupees every month @ R % return for T years, you will get A amount at the end, you should go and check using your own calculations to see if the figures are right or not.

For example, if you can invest 4000 per month (instead of 2000) (Choice 1 example) in the starting years of your career like 10 yrs, then you can stop investing for rest of 25 yrs (In choice 1 we are investing for 35 years) and still generate more wealth around 7 Crore, considering same rate of interest.

Is it practical to put 4000 per months for starting 10 years and then leave it for 25 yrs, May be NOT!!! People tend to take the money out when they require it and never give compounding any chance to show its strength. But if people leave it, they will see how amazing and powerful it is.