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Revealed: The right age to start investing

March 29, 2014 09:57 IST

Revealed: The right age to start investing

P V Subramanyam

The magic of compounding rewards early starters. Delay may make it impossible to attain your goal.

Last week I was speaking to one of the bright kids I work with. For practical purposes let us call him John Galt.

This kid, 25, has just started earning a nice salary. He spends well, can put away a nice amount on a regular basis, but is not doing so.

I asked him why, and he had a good answer. He hopes to start a business (perhaps) and cannot make up his mind about whether to, when to or... many other questions.

So he has decided to keep money in the income bucket (bank fixed deposit) rather than a growth bucket (real estate, equities). Very sensible.

Yesterday another girl, around 30, wanted a pension plan for herself. She is the wife of a very high income guy and can set aside a nice amount on a monthly basis from her income. She is saving for her retirement (this is called the accumulation phase for those who did not know).

Investing success is a function of three important factors:

  • Starting early
  • Investing enough
  • Investing often

Then of course aim for and get a reasonable rate of return.

The math is pretty elementary. And compounding worked in the past, works in the present and will work in the future! Past performance in this case is a great indicator of future returns! :)

The relationship between time (number of years 'n' you keep investing), amount invested (amount 'A' you invest every month), frequency of compounding (monthly, annually), rate of return (interest 'R' earned on your investment), and the total corpus (V) is purely mathematical!

This is how your mooney compounds: V = A*(1+r)^n. It is boring, clear, mathematical and accurate.

If you can control A, n and aim for a reasonable r, V is guaranteed.

The problem is that success requires discipline, and wealth creation should start early and be given a high priority early in one's career.

Suffice it to say if you are 23 years of age and you could save Rs 10,000 a month, assuming a return of 9 per cent per annum you are going to have Rs 26,37,200 LESS (than if you had started investing at 24; just a year's delay) in your retirement account by the time you are 58 years of age.

Quite expensive a delay?

Is it not?

The magic of compounding rewards early starters. Delay may make it impossible to attain your goal. After all like in driving or investing -- start early, drive safely and reach safe advice always holds good.

Do not try to make up in 'r' what you can do in 'n'.

It is like starting late and driving fast.

Photographs: Uttam Ghosh/