Whether it is cricket, F1 Formula race or any other sport, if you start
the game wisely and put in desired efforts in the beginning, then it
becomes easier for you to win the game. Same thing applies in the game
of achieving your financial goals; the earlier you start, it becomes
easier for you to achieve the goals, whether the goal is for children’s
marriage, their higher education, buying a house or your own retirement.
Generally you feel that the small amount of money left with you at the
end of the month after meeting all the household expenses is not going
to grow much by way of saving and will not be able to contribute much in
towards achieving your future goals. So you prefer spending it on
either shopping or catching a movie in nearby multiplex, which makes you
happy momentarily. You regret such unnecessary spending when you are
actually in need of money at some point of time in future and there is a
deficit. Our parents taught us to save money in our piggy bank from the
pocket money we used to get. But, now when we have grown up and our
pocket money has been replaced by our monthly salary, we forget this
teaching and hardly use piggy bank or any other means of saving.
But even small amount saved every month can turn into a magical amount
but for that you should understand the magic and the power of
compounding, how a small amount of regular savings can grow to a magical
figure in future. I will explain you this with the help of a case of my
two friends Raj and Jigar. Raj started investing Rs.1,000 every month
when he was 25 years old, in an investment instrument earning a rate of
return of 12% p.a. for 25 years, whereas Jigar started saving Rs.1,000
from the age of 35 years. At the age of 50 years, Raj’s savings grew to
Rs.18.79 lakhs and Jigar’s savings grew to Rs.5 lakhs. So you can
clearly see the difference in the future amount received by Raj and
Jigar. Raj’s money grew 3 times of what Jigar’s money grew, just by
investing 10 years early. You can also see, investing small amount of
Rs.1,000 monthly can grow to lakhs of rupees in 25 years. Thus the power
of compounding can be best described by the famous saying, “boond boond
se sagar bharta hai”.
You should at least save and invest 15% - 20% of your monthly income.
This specific portion of your income should be kept aside as your
expense, since these investments are going to be utilized in future for
your financial goals. You should never underestimate and assume that
small amount of savings will not be fruitful in future. You should start
saving and investing your surpluses as early as possible, as goes the
saying, “better late than never”.
Apart from starting investments early, it is also necessary to have
disciplined investment. You should not discontinue your regular
investments or withdraw profit or some amount from the accumulated fund,
if the market is low and the returns are poor, which usually happens
while investing in SIPs. If you don’t maintain discipline, the overall
returns from the investment will be low.
You should chose investment instruments for regular savings by taking
into account the investment time horizon and your ability to take risks.
There are varieties of investment vehicles available in the market for
regular investment. For short-term investment horizon i.e. less than 5
years, you shouldn’t take any risk. You should invest in Recurring
deposit schemes or start SIP in Conservative MIP Mutual Fund scheme. For
medium term investment horizon i.e. upto 9 years, you should invest in
Balanced Mutual Fund Schemes via SIP. For long-term investment horizon
i.e. more than 9 years, you can take equity exposure upto 90% by
investing in Equity Mutual Funds Scheme via SIP and the balance in Debt
MF or Gold
Fund. You can also deposit some amount of savings in PPF account as
well, but you need to keep in mind the lock-in period and restrictions
on withdrawal of funds from the account.
So you should save as much as you can and that too as early as possible,
that’s why it is said, “Well begun is half done”. You should develop
savings habit right from the beginning and not think that you have ample
time in future to save. Earlier you start saving and investing in the
right instrument, better and fruitful it will be in future.
Published in: Moneycontrol.com, The Tribune
