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Art of becoming Rich

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It sure is  not easy to become rich. And while making such a statement, we are ready to ignore the definition of ‘Rich’ too.
And just to verify the concept of ‘Being-Rich-Is-Difficult’, ask someone you consider to be rich. I am sure that they will also tell you that it is not easy to become rich. And it’s even tougher to stay rich.

But no matter what anybody else tells you, my view is that the biggest tool you have in your journey to become rich is Time. If you have time on your side, even small amounts can become eye-popping(ly) huge – as you will see in this case study.

So lets get straight to the numbers..

There are two friends named Ramesh and Suresh. Both are of same age (25) and earn decent amounts of money, which theoretically gives them the option of investing a fixed amount every year (after expenses).

Scenario 1:

Ramesh is frugal and believes in saving. He knows that he does not have a rich inheritance and hence, needs to save for himself and his family. Ramesh starts investing Rs 1 lac every year. But he does this only for 10 years between the age of 25 and 35, i.e. he saves a lac rupees every year for 10 years and then stops.

His total contribution is Rs 10 lacs (between age 25 and 35).
Suresh on the other hand thinks that since he is quite young, he can postpone saving/investing for future. He thinks that if he does not save starting from the age 25, and does it after a few years…even then he will be able to become very rich.

So in this example, Suresh starts investing the same amount as Ramesh (Rs 1 lac) at the age of 35 and continues doing it upto the age of 60.

Suresh’s total contribution is Rs 25 lacs (between age 35 and 60).
Now comes the day of reckoning. Both have reached the age of 60.

What’s your guess? Who has more money at age 60?

It might sound surprising, but the answer is Ramesh. Having contributed just Rs 10 lacs, Ramesh now owns a huge corpus of Rs 6.65 Crores!!

And what about Suresh? The answer is that he becomes rich too. But having contributed Rs 25 lacs, he has accumulated a much smaller corpus of Rs 2.36 Crores. And that is despite having invested for 15 more years than Ramesh.

Scenario 1: Ramesh (Rs 6.65 Crores) – Suresh (Rs 2.36 Crores)

Here is the calculation sheet for your reference. The return assumption in this and further scenarios is 14% per annum.

Lets go on and evaluate a few more scenarios…

Scenario 2:

Ramesh is still frugal and still believes in saving. Like the first scenario, Ramesh here also invests Rs 1 lac every year from the 25 to age 35. But Suresh has changed. Though Suresh still does not save anything between the age 25 and 35, he now does realize the power of compounding. So he decides to invest the double amount (than that of Ramesh) between the age 35 and 60.

That is, Suresh invests Rs 2 lacs every year for 25 years.

So in this particular case…

Suresh’s total contribution is Rs 50 lacs (between age 35 and 60).

Once again, the day of reckoning arrives and both reach the age of 60. What’s your guess now? Who has more money at 60?

Answer once again, and surprisingly enough is Ramesh!

Ramesh still attains a corpus of Rs 6.65 Crores as in the first scenario. But Suresh after doubling his investments is still able to reach Rs 4.73 Crores. Now you see? This is the power of investing early. And so big can be the difference when you delay your investments.

Here is the calculation sheet for your reference.

Table 2

Scenario 2: Ramesh (Rs 6.65 Crores) – Suresh (Rs 4.73 Crores)

Lets move on to other scenarios now…
Scenario 3:

Now let’s make this analysis more realistic. As we progress in life, our incomes generally rise. And so do our expenses. So shouldn’t our investments and savings also rise with time?

Suppose you start your career earning Rs 20,000 a month. And you also start investing Rs 5000 a month at that time. After a few years, your salary is almost Rs 70,000. And if you are still investing just Rs 5000, then you are fooling yourself. Investing is done for one’s own future. And it’s one’s own responsibility to maximize it as soon as possible.

So lets get back to this new scenario.

Here Ramesh starts by investing Rs 1 lac at the age of 25. But over the next 10 years, he increases his yearly investment by a small 5%. So over a period of 10 years (between 25 and 35), he invests Rs 12.58 lacs.

On the other hand, Suresh starts late at 35 with Rs 1 lac a year. But he also starts earning more and more every year and is able to increase his yearly investments by 10% (double that of Ramesh’s 5%). His total contribution over a period of 25 years (between 35 and 60) is Rs 98.3 lacs.

Day of reckoning…

I wont even ask you this time. :-)

Once again, Ramesh has more money when he retires at 60!! Ramesh manages Rs 7.94 Crores in comparison to Rs 5.08 Crores accumulated by Suresh.

Isn’t this amazing? Starting as early as possible and just investing for few years and then just waiting. And after a few decades, you have more money than someone who started late, invested many times more than what you invested.

This is indeed the 8th Wonder of the World. We need to give standing ovation to the concept of Compounding. :-)

Here is the sheet for 3rd scenario’s calculation.

Scenario 3: Ramesh (Rs 7.94 Crores) – Suresh (Rs 5.08 Crores)

So lets move on to the 4th scenario.

Scenario 4:

There is only one change in this scenario over the 3rd one. I am making this scenario more realistic. And the change I am making in this one is based on the question that why should Ramesh stop investing at age of 35? Shouldn’t he continue further and upto the age of 60?

So here is it….Ramesh does not stop investing at 35. He continues investing upto 60 and increasing his contribution by 5% every year. Compared to him, Suresh increases his contribution 10% every year.

To cut the long story short, after 60 years, Ramesh has Rs 13.3 Crores and Suresh has Rs 5.08 Crores.

I have nothing more to say for this scenario. :-)

Scenario 4: Ramesh (Rs 13.30 Crores) – Suresh (Rs 5.08 Crores)

Here is the sheet for your reference.

I can go on and on with more scenarios but that would only help the case of investing early, which we have already proven in previous four scenarios. For example, we can reduce the return assumption from 14% to smaller numbers, etc. But the point which I am trying to make through this post, is, that there are some really amazing benefits of starting early when it comes to investing.

You can start later and still get to the same final corpus. But that would require you to earn much higher rates of returns…and that too for many years – which is neither easy nor practical.

And just to illustrate this, here is the 5th scenario :-)

Scenario 5:

Ramesh invests Rs 1 Lac for 10 years (from 25 to 35)
Ramesh’s Return assumption = 14%
Corpus at age 60 = Rs 6.6 Crores
On the other hand,
Suresh invests Rs 1 Lac for 25 years (from 35 to 60)
Suresh’s Return assumption = 20%
Corpus at age 60 = Rs 6.8 Crores

Scenario 5: Ramesh (Rs 6.6 Crores @ 14%) – Suresh (Rs 6.8 Crores @ 20%)

Both have accumulated almost same corpus after reaching 60. And Suresh has started 10 years late and invested for 15 more years. But do you think 20% per year return can be attained? I don’t think so. It’s almost impossible. It is not a reasonable expectation to have.

For your reference, here is the calculation sheet of Scenario 5
Table 5.

All these five scenarios show that if you start early, you don’t need to earn eye-popping rates of returns to accumulate big sums of money. All you need is time. And when you start early, you have a hell lot of time. The earlier you start, longer does your money have the time to grow.

And to end this analysis, I leave you with a very small 4-Step guide to help you become amazingly rich:

  1. Start early

If possible, invest from the day you start earning your first salary. You would be surprised at how much these small amounts can increase when invested for long periods of time.

  1. Treat Investments as Monthly Bills and be regular with them.
  2. Do whatever it takes to maximize the amount you can invest.
    First thing is that no matter what happens, you need to invest regularly. And in case you have surplus money, make it a point to invest as much of it as possible.
  3.   Be patient. And in long term, you will need loads   of it.
    One of the biggest mistakes people make is that they withdraw/touch the money they start accumulating. The biggest problem of compounding, or I should say the power (not available to many) is that it works best, when you do not disturb it. In initial few years, the results will seem extremely slow. And you will start losing your faith on it. But hold on. In a few more years, you will realize the power of compounding.This post clearly indicates that there is price to be paid for any delay in investing. And mind you, this price is not small. You can delay and still become rich.  But remember that the biggest side effect of procrastination (when investing) is that you will not become as rich as you might have become, had you not procrastinated.So irrespective of your age, do not wait any further. Go on…Now is the time to begin investing for long-term. And remember that the cost of delaying your investment is enormous. Even one year makes a huge difference.

Credits : IVentures Knowledge Series

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