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Why Early Movers have an Advantage when it Comes to Savings?

Image for representation.

Image for representation.

It is important to work hard in life to achieve your financial goals, however a little smart work in your investments can put you on the right track at the right time.

A Simple Example that can change the way you perceive Monthly Savings.

‘The early bird catches a worm’ and an ‘early mover’ to savings leverages benefits of compound interest like no other. Teenagers who aim to be Millionaires must start stashing their cash aside in SIPs or other investment instruments to take full advantage of the simple rule ‘Money makes Money’. It is important to work hard in life to achieve your financial goals, however a little smart work in your investments can put you on the right track at the right time.

Let us show you a financial calculation with a simple example of Ram & Sham that explains how someone who starts saving in his 20s creates enormous wealth with almost same amount or less, than someone who tries to catch up a decade or so later, in his 30s.

Ram and Shyam are two friends, both are well educated, have good jobs and full financial freedom.

Ram starts saving ₹2000 every month at age 25 while Shyam feels it’s too early to talk about savings.

Both of them get married by the time they are 30 and get on with the newly-discovered expenses that marriage brings along. However, Ram continues to save ₹2000 every month as he has formed a habit to take out this wee bit little saving each month.

By the time Ram turns 35, he has already created a corpus of ₹4,31,451* Lakhs by saving just ₹2000 per month consistently over the last 1 decade. (*assuming 8% interest rate, compounded yearly)

Shyam takes some inspiration from Ram and decides to save every month, and to catch up pace with his friend, he plans to double his monthly savings to ₹4000 per month. Let us see how he fares: He’ll be able to create ₹8,62,902* by the time he completes age 45. (*assuming 8% interest rate, compounded yearly)

Meanwhile, Ram carries on with his paltry investment of ₹2000 per month and reaches ₹13,06,962 by the time he completes age 45.

So, Shyam despite saving double than Ram for the later decade is not able to match up the wealth Ram created by starting early.

Now let us bifurcate the Compound Interest from their Corpus,

Ram’s Savings = ₹5,04,000 (Actual Money Set Aside) + ₹8,02,962 (Compound Interest Earned)

Shyam’s Savings = ₹5,28,000 (Actual Money Set Aside) + ₹3,34,902(Compound Interest Earned)

Hope this Helps!

Yesterday was the best day to ‘Save Money’, Today the second best!

first published:January 18, 2018, 21:02 IST