Tags:
Journalism of Courage
When Bhargavi a 23 year old came up to me and said Sir,if I have Rs 10 crores in my life,I will feel rich,to me it was a signal of poor understanding of compounding!
This kid is 24 years of age,has a degree in finance and a good career waiting ahead of her. She will inherit some money from her parents,a house in Mumbai ,marry a similar profile guy and start life reasonably well. Her parents will provide her a head start they paid her college fees,and will leave her some money and not need her support for their old age. So with no pay back to her parents she can aggressively invest. To her this figure of Rs 10 crores looks big because she is seeing it from todays perspective.
Actually she should be seeing it in the perspective of the value of the rupee 30 years hence,when she would be retiring.
For example,the house 8211; assuming that the house appreciates at a reasonable clip,it will go from Rs 1 crore to about Rs 32 crores by the time she retires!
What will be her salary when she is trying to accumulate her dream target of Rs 10 crores?
Well,she will earn annually about Rs 4.5 lakh to start with,earn about Rs 13 lakh at the age of 35 years,earn about Rs 25 lakh at the age of 45 and will retire on a salary in excess of Rs 45 lakh.
Important thing for a young person like Bhargavi to realize is that an early start even with a small amount is far more useful than waiting for a big amount. In the initial stages of her life when she is staying with her parents,not paying rent or even for food expenses it is easy to invest a big amount of her salary.
Assuming she has no investments as of now,we assume that she can start off with a SIP Systematic Investment plan of Rs 10,000 a month slowly taking it up to Rs 1,00,000 a month by the time she is 54 years of age. The reason why I have reduced the SIP amount between her age of 36 and 41 years is just to allow for some other expenses or emergencies. Let us also assume that the money grows at rates mentioned in the table below,this will also accumulate about Rs 10.25 crores-this on an investment of Rs 1.35 crores!
Will she be able to make these investments? It looks like a breeze. She will take a break for having and bringing up children,but her husbands investing will make up for the gap. She will be able to invest much more! As she is not the primary provider for the family she will be able to invest much more aggressively in equity funds and reap the benefits over a long period!
The lessons are very simple. Do as big a SIP as possible,as soon as possible. The greater the amount of money that gets into compounding assets like equity,and the earlier that it gets,the greater the wealth that you will create for yourself. This is the universal truth of wealth creation.
Author is a blogger at http://www.subramoney.com
