Building Wealth

 

“Compound interest is the eighth wonder of the world. He who understands it, EARNS it….He who Does not…..PAYS it.”

                                                                                                                                                                                      Albert Einstein

                                                                                    
 Wealth Creation Mantra                                                                                   

  • The more you save, the more you make
  • The early you start, the more you make
  • The higher your return, the more you make      

 

Let us understand it by simple example :

Ram and Shyam were twin brothers. Ram started investing Rs. 5,000 per month at the age of 30 years and happened to choose an investment option that gave him a return of 15% p.a. over the next 20 years. That is when he had reached the age of 50 years. 

Till that time, Shyam had not invested a single rupee and had always believed in spending whatever he earned to buy the things that he wanted. At 50, he realized that the income would soon stop and he should save some money to ensure he does not have to work in his retirement years. He called an investment advisor and explained his situation. Shyam also told him the investment experience of Ram. Shyam asked the advisor what Ram wealth would be when he retires, i.e. at the age of 60 years. 

After understanding Shayms requirements, the advisor was quick to do the math and told Shyam that Ram would have invested Rs. 18 lakhs over the period and would have accumulated a sum of approximately Rs. 3.5 cr by the time he reaches the age of 58 years. He was quick to add that such a sum would be enough to ensure Ram had a comfortable retirement without compromising on his lifestyle. 

Shyam then told the investment advisor that he would be willing to invest Rs. 15000 every month for the next 10 years and if the investment continues to grow 15% p.a., he should also have as much money as his twin brother, i.e. Rs. 3.5 cr Cr. He was in for a rude shock when the advisor did his math and told him what he would have accumulated then. The wealth accumulated then would be roughly Rs. 41 lakhs even after investing exactly the same amount as Ram. 


This is what the power of compounding did to Rams investments. As the time  increases, the power of compounding increases. 

 

Ram

Shyam

Starts investing at the age

30 years

50 years

Monthly savings

Rs. 5,000

Rs. 15,000

Returns (assumed)

15% p.a.

15% p.a.

Both invest till the age of

60 years

60 years

Total investment

Rs. 18 lacs

Rs. 18 lacs

Wealth accumulated at 60

Rs. 346.16 lacs

Rs. 41.28 lacs

 

Shyam asked the advisor to revise the plan such that his accumulation is also equal to Rams. Shyam had only two choices, either increase his return on investment or increase the monthly savings. 


Now, Shyam wants to catch up with Ram

He has two choices: 
Either earn on his investment @ 45.73% p.a. 
OR 
Save monthly Rs. 1,25,778.53 

The essence of how to create wealth! 

Enhancing Future Value with The Wealth Creation Mantra 

1) The more you save, makes a difference. Save More. 

Amount saved per month

Total Amount Saved

Value after 25 years

5000

15, 00,000

40,73,986

3000

9,00,000

24,44,391

1500

4,50,000

12,22,196

1000

3,00,000

8,14,797

*The numbers are shown only for illustration purpose

2) The sooner you start, makes a difference. Start Early.

Rs. 1000 invested per month @ 8%  per annum till the age of 60 years

Starting Age

Total Amount Saved

Value at the age of 60

25

4,20,000

23,09,175

30

3,60,000

15,00,295

35

3,00,000

9,57,367

40

2,40,000

5,92,947

*The numbers are shown only for illustration purpose 

3) The more you earn, makes a difference. Earn More. 

Rs.1000 invested per month

     Growth  Rate

Value after 10 years

Value after 25 years

5%

1,55,929

5,97,991

7%

1,74,094

8,14,797

10%

2,06,552

13,37,890

14%

2,62,091

2,727,278

*The numbers are shown only for illustration purpose 

Summarizing Power of compounding  

                                                              
Wealth creation is not a function of income; it is not a function of investment expertise, 
It is a matter of Regular Savings! 

For most of us,

  • Income is monthly
  • Many regular expenses are also monthly
  • Hence, saving is also monthly

Thus, the simplest form of planning is to invest regularly on a  monthly basis and benefit from the power of compounding. 

As you can clearly see, Compound Interest works for you if the following discipline is followed:

1) Systematic Investment - A certain amount needs to be invested periodically, preferably every month in a Compounding plan (Recurring Deposit, Mutual Funds or Equity) without fail. Of course, RD (Recurring Deposit) is the safest since the Principal is guaranteed. But, the Rate of Compound Interest provided by Banks for RD will be very less. Hence, people try to invest in Mutual Funds or Equity in solid companies which can provide a better Compounding Interest over long term. If the bright company manages to grow at a rate of above 15% every year, the money gets compounded at the same pace.


2) Start Early - Saving is a habit which needs to be cultivated at an early stage of life. A person who invests Rs 1000 in a RD with 8% Compound Interest for a period of 30 years will get Rs 1484262 on Maturity.The earlier you start the better.


3) Stay invested for a longer period of time - Compounding works only as the Principal + Accumulated Interest grows. The longer you are in the plan, the Interest starts working for you. The real power of Compounding can be seen when we continue this discipline for decades. You can retire rich.

So, with discipline, homework and long term vision, enormous wealth can be created with the amazing power of compounding. Its no wonder that the investors who created enormous wealth, are those, who stayed invested for a long time.

 

Creating Wealth By Doing SIP – Power Of Compounding

Anita, is a 26 year old, sales Manager in a bank, and is living with her husband Suresh, who is 31 years old, and her new born baby girl Divya. Anita wants to make sure that Divyas future is not compromised on, as she has big plans for her. Anita, is still young and can have an aggressive investment approach so why not invest through SIPs?

Systematic Investment Plans, are commonly known as SIPs. They are a fixed amount of regular savings, that go into mutual funds, which are nothing but a pool of funds collected from many investors for investing in stocks, bonds and other money market instruments.  SIP is an investing tool related to mutual funds. It inculcates a habit of disciplined saving. The magic of SIPs do not work overnight, but it works on the investments, collected over the years.

The magic of SIPs can be understood if we understand the Power Of Compounding. Why do we water our plants regularly? So that they grow into a beautiful tree, right? It cannot happen over night, it takes years for it to grow into a tree. Also, it needs to be taken care of everyday, for it to grow properly. We can apply the same logic to SIPs. To create a huge corpus, you have to regularly water it with SIPs and over the years, it will grow into the corpus you wish for. This process of growth is called Power of Compounding.

 

Let us take an example to make it clear, if I invest Rs. 8000/- in a fund, having an interest rate of 12% p.a. (i.e. 1% per month), look at the below table:

Month

Opening Balance (Rs.)

SIP amount (Rs.)

Interest

@ 12% p.a.

Closing balance (Rs.)

1

0

8000

80

8080

2

8080/-

8000

160.8

16240.8

3

16240.8

8000

242.408

24483.208

4

24483.208

8000

324.83

32808.038

5

32808.038

8000

408.08

41216.1204

 

From the above table, we can see that the interest per month is not calculated on the SIP amount alone, but on the opening balance as well (which includes the SIP and interest of the previous month). This is how compounding works. So you can just imagine, 10 to 15 years down the line, what the corpus will be.

This table shows, the amounts after 5, 10, 15 and 20 years, with the same above of the SIP being Rs. 8000/-, @12% p.a. for a term of 20 years:

 

Time

Fund Value

After 5 years

659890.9324

After 10 years

1858712.611

After 15 years

4036607.996

After 20 years

7993183.352

 

Shocked?? Thats the magic of a SIP of Rs. 8000/-.

To create wealth through SIPs, there is another method used, it is called Rupee Cost Averaging.This concept is used when the markets are down and advantage can be taken of the situation.

At TRP we always believe in creating wealth for our customers.

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