Lesson 3 of 6, 4 minutes
Compounding and the cost of waiting
Two people invest the same amount. One starts ten years earlier.
Asha and Vikram are both 25 and earn the same salary. Asha starts investing ₹10,000 a month now. Vikram wants to wait until life settles down, and starts the same ₹10,000 at 35. Both stop at 60.
Asha invests for 35 years and Vikram for 25. She pays in ₹42.00 L and he pays in ₹30.00 L. The gap between what they paid is ₹12.00 L, which is 10 years of instalments.
The gap between what they end up with is much wider.
- Asha, started at 25₹4.34 Cr (₹56.46 L in today's money)
- Vikram, started at 35₹1.45 Cr (₹18.91 L in today's money)
Where the extra money comes from
Returns earn returns. In her first year, Asha's money earns a return on what she paid in. In her second year it earns a return on what she paid in and on the first year's return. This is compounding. By year 8, her investments earn more in a year than she pays in during that year.
Her first 10 years of instalments are worth ₹21.24 L when Vikram starts. That sum then grows for 25 more years without another instalment and becomes ₹2.89 Cr (₹37.55 L in today's money). Those are the years Vikram can't buy back. To reach her total from a start at 35, he would have to invest ₹29,856 a month.
What to take from this
Early on, the start date matters more than the amount. A small instalment that begins now does more than a large one that begins in ten years, and you can raise it as your income grows. Step-up investing shows how much a yearly raise adds.
Do this week
- Start with an amount you are sure you won't have to stop. An instalment that survives a bad month is worth more than an ambitious one that gets cancelled.
- Set it to leave your account the day after your salary arrives. You then budget from what is left.
- Leave it invested. Money that is taken out stops compounding, and the years it had already earned are gone with it.