I’m too young to start Pension planning?

This is a most common way new joiners in MNCs used to react when I approach them with a life insurance policy.Power of now is really important. But being futuristic is the key to success whether it is life, technology, economy and anything for that sake.

A more practical approach to Aging

You are 25. So what. Next 24 hours passed by, you are 25+1 day old. The same you will be 35 and 45 and 55+ when some more 24 hours are passed by. Sorry if I’m making you bored by philosophy.

Compound Interest – a forgotten episode

Many a times I think we lost our basics and wandering in a world of illusions created by the “knowledge abundance” of this information era.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Power of Compounding: Albert Einstein – the great scientist of modern world

We all might have learned what is compound interest during our school days and many of us can even remember the formula to compute that. But what is the use of knowing all these without applying in life? Here is an excellent article on compound interest by investopedia.

Further we will discuss another side of compounding and how to be winner.

Cost of Delaying

Let me just explain it with 2 examples.

Example 1 : Invest More Years, Reap More Benefits

An individual who starts saving at 25 yrs of age by investing Rs. 1000 / per month may collect up to Rs. 40 Lakhs. Whereas his investment over the period may just be Rs. 4.2 Lakhs. On the other hand, if the same individual delays his saving by 5 yrs, his wealth may be just 25 lakhs. A loss of approx Rs. 15 Lakhs!

Example 2 : Delay Start, More Loss

Deepika, Arun and Karthik begin their careers together at the age of 25 but have different attitudes towards savings. Deepika believes in saving from day 1 of her career as she got the opportunity to understand the power of compounding from her parents. Arun and Karthik believe that, they are young, now is time to enjoy. Savings can be started when it is necessary!

  • Deepika started saving Rupees 10 thousands in the first year. She continues saving the same amount per year for 35 years till her retirement.
  • Arun is now 27 married. His new responsibilities made him to start saving rupees 10 thousands every year and continues saving 10,000 per year for 33 years till his retirement.
  • Karthik followed Arun, gets married and becomes a father at the age of 30. Life lessons are sharper than book lessons. Now he also gets into the habit of saving. The amount also the same as his predecessors ie.10 thousands every year and continues for 30 years till his retirement.

Deepika began at age 25 and saved Rupees 3.5 lakhs; Arun began at age 27 and saved Rupees 3.30 lakhs and Karthik began at age 30 and saved Rupees 3 lakhs.

Now comes the assessment part. Who do you think made the most?

It seems quite obvious who saved more and who would have more wealth on their retirement. But consider this. If each of them got a compounded return of 15% per year on their savings, Deepika would have over Rupees 1 Crore, Arun approximately Rupees 75 lakhs and Karthik to a sum of rupees 49 lakhs approximately.

Moral of the story is..
Start early. Save less. Get more!
Start late. Save More. Get less !

Growing old is mandatory; growing up is optional. ~Chili Davis

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