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Home > Business > Columnists > Guest Column > Pavan Bajaj


Want to be rich? Read this!

June 25, 2005

These days, there are a lot of opportunities for youngsters to earn during their college time or after completion of studies. But most of them spend all their money without saving anything.

It always pays to save extra money for your later years that may be used for big ticket purchase like buying house, car, family needs, and higher studies. It can be used for retirement years when you will depend on your savings.

Normally youngsters think that retirement planning needs to be done when you reach 40 or above. Why they should start thinking of retirement savings when they are just 25 years old?

Normally people work about 40 years from age of 25 years to 65 years. During these 40 years they need to provide for assets like a house, good education for the children, some insurance, maybe a car, etc.

They need to spend money on vacations, medical needs for family, marriage, etc. On top of all these expenses, they need to save for 25 years of retired life (from age 65 years to 90 years).

During retired life you will need the same amount of money or even more due to medical expenses, vacations and -- most important -- inflation.

Assume that an age of 65 you need Rs 30,000 for monthly expenses. Then by age of 80 you will need at least Rs 25,000 to maintain a similar life style at zero per cent inflation. Considering 5 per cent inflation, you will need at least Rs 67,000 for monthly expenses to maintain a similar lifestyle.

All these expenses will be met through income earned during your working life. So more money saved during working life, better will be retired life.

You may argue that during the initial years in your career, one earns less. Thus, one cannot save more money. But during later years of life one earns more so one will be able to save more money. So why should you start saving some money earlier in your career, when you can save a lot more later in life?

The following example will explain why investing smaller amounts earlier in life is better than saving big amounts later in life.

Namit is careful spender and he ensures to save at least Rs 10,000 every year. Namit starts saving Rs 10,000 every year at age of 25 years. He invests money in various investment instruments like PPF, mutual funds, stocks, property and earns an average 15 per cent compound annual return.

He saves only till age of 40 and then he stops saving due to family obligations like higher studies for children, children's marriage, buying a house and a car.

Gagan, on the other hand, spends all his income during initial years and he is not bothered about retirement planning. When Gagan turns 40 years, he realises that he need to start saving for retirement too.

Gagan starts saving Rs 80,000 every year at age 40. He invests money in various investment instruments like PPF, mutual funds, stocks, property and earns an average 15 per cent compound annual return.

Both Namit and Gagan retire when they get 65 years old. So they are not able to invest any extra money for retirement after 65 years age.

At age 65, who will have more money? Your initial guess will be that Gagan will have more money because:

1. Namit was saving just Rs 10,000 every year while Gagan was saving Rs 80,000 every year.

2. Namit saved money for just 15 years (from age 25 to 40). But Gagan saved money for 25 years (from age 40 to 65).

You will be surprised to know that Namit will have more money at the age of 65 and Gagan will be far behind compared to Namit.

See the tables below to see how this happens and then read on after the tables too.

Age

Namit saving Rs 10,000 yearly, from age 25 to 40

Amount Invested

Total Amount at year beginning

Interest @15%

Total Amount at year end

25

             10,000

            10,000

              1,500

        11,500

26

             10,000

            21,500

              3,225

        24,725

27

             10,000

            34,725

              5,209

        39,934

28

             10,000

            49,934

              7,490

        57,424

29

             10,000

            67,424

            10,114

        77,537

30

             10,000

            87,537

            13,131

       100,668

31

             10,000

           110,668

            16,600

       127,268

32

             10,000

           137,268

            20,590

       157,858

33

             10,000

           167,858

            25,179

       193,037

34

             10,000

           203,037

            30,456

       233,493

35

             10,000

           243,493

            36,524

       280,017

36

             10,000

           290,017

            43,503

       333,519

37

             10,000

           343,519

            51,528

       395,047

38

             10,000

           405,047

            60,757

       465,804

39

             10,000

           475,804

            71,371

       547,175

40

             10,000

           557,175

            83,576

       640,751

41

                    -  

           640,751

            96,113

       736,864

42

                    -  

           736,864

          110,530

       847,393

43

                    -  

           847,393

          127,109

       974,502

44

                    -  

           974,502

          146,175

    1,120,677

45

                    -  

        1,120,677

          168,102

    1,288,779

46

                    -  

        1,288,779

          193,317

    1,482,096

47

                    -  

        1,482,096

          222,314

    1,704,410

48

                    -  

        1,704,410

          255,662

    1,960,072

49

                    -  

        1,960,072

          294,011

    2,254,083

50

                    -  

        2,254,083

          338,112

    2,592,195

51

                    -  

        2,592,195

          388,829

    2,981,024

52

                    -  

        2,981,024

          447,154

    3,428,178

53

                    -  

        3,428,178

          514,227

    3,942,404

54

                    -  

        3,942,404

          591,361

    4,533,765

55

                    -  

        4,533,765

          680,065

    5,213,830

56

                    -  

        5,213,830

          782,074

    5,995,904

57

                    -  

        5,995,904

          899,386

    6,895,290

58

                    -  

        6,895,290

        1,034,293

    7,929,583

59

                    -  

        7,929,583

        1,189,438

    9,119,021

60

                    -  

        9,119,021

        1,367,853

  10,486,874

61

                    -  

      10,486,874

        1,573,031

  12,059,905

62

                    -  

      12,059,905

        1,808,986

  13,868,891

63

                    -  

      13,868,891

        2,080,334

  15,949,225

64

                    -  

      15,949,225

        2,392,384

  18,341,608

65

                    -  

      18,341,608

        2,751,241

  21,092,850

All figures in rupees

Gagan saving Rs 80,000 yearly, from age 40 to 65

Amount Invested

Total Amount at year beginning

Interest @15%

Total Amount at year end

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -   

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

              -  

                     -  

                -  

               -  

        80,000

              80,000

         12,000

        92,000

        80,000

            172,000

         25,800

      197,800

        80,000

            277,800

         41,670

      319,470

        80,000

            399,470

         59,921

      459,391

        80,000

            539,391

         80,909

      620,299

        80,000

            700,299

       105,045

      805,344

        80,000

            885,344

       132,802

    1,018,146

        80,000

         1,098,146

       164,722

    1,262,867

        80,000

         1,342,867

       201,430

    1,544,297

        80,000

         1,624,297

       243,645

    1,867,942

        80,000

         1,947,942

       292,191

    2,240,133

        80,000

         2,320,133

       348,020

    2,668,153

        80,000

         2,748,153

       412,223

    3,160,376

        80,000

         3,240,376

       486,056

    3,726,433

        80,000

         3,806,433

       570,965

    4,377,398

        80,000

         4,457,398

       668,610

    5,126,007

        80,000

         5,206,007

       780,901

    5,986,909

        80,000

         6,066,909

       910,036

    6,976,945

        80,000

         7,056,945

     1,058,542

    8,115,487

        80,000

         8,195,487

     1,229,323

    9,424,810

        80,000

         9,504,810

     1,425,721

  10,930,531

        80,000

        11,010,531

     1,651,580

  12,662,111

        80,000

        12,742,111

     1,911,317

  14,653,427

        80,000

        14,733,427

     2,210,014

  16,943,441

        80,000

        17,023,441

     2,553,516

  19,576,958

All figures in rupees

Few points to observe

1. Namit invested a total amount of Rs 150,000, whereas Gagan invested total amount of Rs 20,00,000.
2. Gagan invested more than 13 times the amount invested by Namit.
3. Still at retirement age, Namit was Rs 15,15,892 richer than Gagan.
4. At age of 40, Namit was earning more than Rs 80,000 every year just on interest income. So even if Namit was not investing any money from age of 40 onwards, the interest component was taking care of the growth of his investment till he was 65 years old.
5. Due to this, even though Gagan was investing Rs 80,000 every year from age of 40 onwards he will still lag behind Namit forever.
6. Even if Gagan and his family invests Rs 80,000 for next 1,000 years, they will still not be able to beat Namit in terms of total wealth accumulated.
7. After retirement, Namit will continue to get Rs 27,51,241 every year as interest, even though he invested just Rs 150,000.

Conclusion

It always pays to invest early in life. Even if invested amount is very small it can grow big over time due to compounding returns.

The author works with a software company in Bangalore. The opinions expressed here are personal.




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Number of User Comments: 57




Sub: Calculation based on interest rate from 8 to 15 %

Hi, I tried calculating same data based on interest rate from 8 to 15 %. Following are the results: Int First Guy Second Guy Diff ...


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Sub: good concept for youn stars

The author has given good concept for young stars abt savings.Eventhough 15% intrest rate is not possible take a loan pay intrest,the property will give ...


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Sub: interest

tell me which is the investment mode that can give me a flat rate of 15%.thats my only confusion in this article.otherwise thanks a lot.a ...


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Sub: Want to be rich? Read this!

How in the world we can get this 15 % interest ?? :) subbu


Posted by subbu





Sub: Want to be rich

notwithstanding the seemingly unrealistic returns of 15% (and no impact of tax), the message of saving early and its benefits have been very well illustrated. ...


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