When we begin earning, the last thing on our mind is planning our finances and preparing for the future or any emergencies. We are thrilled to finally earn a paycheck on our own and find several ways to splurge that money. As we grow older and wiser, and the need to undertake more responsibilities increase, we start to broaden our horizons and plan ahead for our future. But what we often fail torealise is that we would never get back the time we have lost. In the investment world, time is as valuable as money. In fact, time creates wealth. Let’s understand this with the help of an example.
Mohit and Tarun are best friends aged 25 who recently started earning. Mohit works for a government job while Tarun has got a rewarding opportunity at a car dealership.Their attitude for saving is quite contrasting. While Mohit is frugal, Tarun likes to live a lavish life and often spends like there’s no tomorrow. To give Tarun some financial direction, Mohit called their senior, a financial advisor.
On asking about their investment plans and their financial plans, Mohit revealed that he saves Rs10,000 every month and invest in mutual funds using an SIP (Systematic Investment Plan) approach. On the other hand, Tarun said that he wants to enjoy life while he is young and would start saving 10 years down the line.
Using an SIP calculator, the senior showed Mohit and Tarun that if Mohit invests Rs10,000 in mutual fundsfor 35 years till the time he retires, he would have accumulated a corpus of around Rs6.5 crores by the time he turns 60, assuming that his mutual fund investmentsyeild a return at 12% p.a. Further, he explained that if Mohit stepped up his investments by even 10% each year, he would have accumulated a corpus of around Rs18 crore, assuming the same rate of returns.
Perpetuated by the entire scenario painted in front of Tarun, he said that he’ll start saving double of what Mohit does right now in 10 years. Again using a mutual funds SIP calculator, the senior showed that even after investing double of Mohit, i.e. Rs20,000 each month, Tarun would fetch just Ra3.8 crores, assuming similar rate of returns at 12%. Also if he stepped his investments by 10%, his corpus would touch just Rs4.3 crore, which is a far car from Rs18 crores.
Why did this happen?
The magic of compounding. Under the compudning effect, the returns work to generate returns on their own. It implies that our savings, when invested at an early stage, have the power to grow exponentially. It might start slow, but with time the returns pick up and are eventually unstoppable. Also referred to as the eighth wonder of the world, the magic of compounding works best when your mutual fund investments are invested for a longer duration.
So, don’t waste your time anymore. Remember, time is money, literally. The earlier you invest in mutual funds online, the better returns you will earn on maturity. Happy investing!