This article emphasizes the importance of starting to save early in ones life. It also talks about the positive impact of compounding.
In “Saving enough is not enough – Effect of Inflation“, we saw that inflation can have a devastating impact on your savings and long term goals. In “Goal Based Investing“, we saw how to save enough to counter this effect.
But is there a way to save, so that the impact of inflation is further reduced?
Well, inflation is the biggest enemy of your savings. To fight it, you need to take the help of your biggest friend – Compounding.
What is Compounding?
Compounding simply means earning money from your earnings!
Say, you keep Rs. 100 as a fixed deposit (FD) at the rate of interest of 7%. At the end of the year, you have Rs. 100 back, and you have Rs. 7 as interest. Now, you invest back not just your original Rs. 100 (your principal), but also Rs. 7 (your earnings). This means that Rs. 100 earns interest, but even Rs. 7, which is your earning, earns interest!
This means you are making your money work very, very hard! (By the way, this same concept is behind the compound interest formula that we learnt in school!)
And the more time you give to this process, the more your money grows – because your earnings get more opportunities to bring in more earnings. Therefore, you should try to maximize the time for which you invest.
And therefore, it pays to start young. If you start when you are young, you can invest a relatively smaller amount to reach even a big target.
Example
Here is an example. Say you want to save Rs. 50,00,000 for your retirement, which would be when you are 60 years old. If the rate of interest is 8%, here is what you need to invest if you invest it at these different ages:
| Age at the time of investment | Amount Required |
| 25 | 3,38,173 |
| 30 | 4,96,887 |
| 35 | 7,30,090 |
| 40 | 10,72,741 |
| 45 | 15,76,209 |
| 50 | 23,15,967 |
Login Required Download the spreadsheet, so that you can work out your own values
Imagine investing just Rs. 3,38,173 to get Rs. 50,00,000 – isn’t that simply great?? And that is the power of compounding.
At the same time, see that if you start investing just 10 years later, you have to invest more than double the amount to get Rs. 50,00,00.
Thus, it pays greatly to start young!
This also means that you should start saving for your goals as early as you can. Please read the article “Goal Based Investing” – it has a step-by-step explanation of how to save for your long term goals.
Remember: The earlier you start saving, the better it is!!
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Hi Sir
I want to get some rough idea regarding returns from a LIC endowment plan
Currently i ve jeevan anand LIC for 30 years whose yearly is 16k nearly i.e. for 5lak after 30years
I just wanted to knw how much max i can expect after 30 yrs and will it counteract to the rising inflation til then.
thanks for ur reply
Hi Amit,
LIC invests the money in the markets (debt & equity) on our behalf, and earns a profit from it. This profit is distributed to the policy holders every year.
The profit made by LIC varies from year to year, and therefore, our returns would also vary every year.
But usually, LIC’s endowment plans make around 7% every year – this is just about enough to beat inflation by a small margin.
Hi Abby,
No problem at all – I am glad that I could help.
To be frank, I do not know enough about this issue you are facing – I know NRIs in USA have restrictions on investment in Indian stocks and MFs because of some taxation issues with the Internal Revenue Service (IRS) of US.
Probably, its similar taxation (or double taxation?) issues that prevent NRIs from some other countries like Australia and NZ from investing in India…
I am not sure if this restriction can be circumvented, as this has to do with legal issues.
However, maybe I can suggest alternatives…
As far as gold ETFs are concerned, as I suggested earlier, you can invest in Gold ETFs in your country. After all, gold is a global commodity and the prices of gold ETFs in any country would move in line with the gold price movement in the world markets.
So, it really doesn’t matter in which country you make gold investment.
Coming to stocks – well, they are country specific, so it can’t be as easy as gold ETFs!
To my US readers, I have been suggesting to invest in India focussed funds like MINDX. These funds invest in some of the best stocks from India, and more or less mimic the movement of the Indian stock market.
That way, you can participate in the Indian market while still investing in your own markets! You can explore the possibility of investing in India focussed funds trading in the US, or you can find out if any such funds are traded in NZ.
(You can find out more about MINDX at: “Matthews India Fund MINDX: A good proxy to invest in India“)
Another option to invest in Indian companies is to invest in the ADRs / GDRs of Indian companies. Many good Indian companies have ADRs and GDRs, and you would be able to invest in some of the best Indian companies.
(You can find out more at: “What is American Depository Receipt (ADR) and Global Depository Receipt (GDR)“)
hi Raag Vamdatt
Thank you so much for your time and efforts in answering my questions. It was really helpful.
As one of suggestion was to invest in equity/mutual funds. I was trying to get information on opening DEMAT account, NRI home loans. Now I understand from ICICI that demat acct facility/NRI home loan is not available to us in New Zealand & in some case for Australian Canada and USA. ICICI bank does not allow me to open Demat acct.
Do you by any chance have information on How to invest in gold ETFs( who are the service providers) or any regulations which prevent NZ citizens opening DEMAT account. Wht would be the way to open dmat acct. There might be other brokers who might be allowing this?
I want to invest in mutual funds & ETFs in India but just dont know how to go about this after the response I had from ICICI bank.
Any suggestions with whom to open demat accts with? or past or current experience with brokerage firms in India who can help me out with investment?
regards
Abby
Could you please elobrate a bit on the calulcation part invloved in this article?
Thanks,
Gowdham
Hi Gowdham,
Please check out the article “Goal Based Investing“. It has detailed explanation of the calculations involved.