Advantage of Time and Power of compounding

Any financial bog cannot be complete without discussing the importance of time and compounding effect. Investment that you are going to make now can have far larger effect than the effect if you start the same investment 3 years later.

Let’s consider a scenario where there are person A, B and C who started earning at the age of 24. Person A believe is little conservative and started investing in FD each year with the amount of 5000 per month while person B has started investing the money in mutual funds making return of 10% and Person C is not making any investment till 28.

Person	A	B	C
Investment/Month	5000	5000	5000
Investment/Year	60000	60000	60000
Started at Age	24	24	28
Rate of Return	8	10	10
Total Money at 40	18.2 Lakh	21.5 Lakh	12.83 Lakh

·         Return Impact - Even a 2% increase in the return can cause a difference of 3.3 Lakh in the overall amount

·         Time Impact -  Starting late by 4 years can reduce the total amount drastically

Lesson to be learned from this example is to start saving early and identify the opportunity which can deliver best returns based on the risk profile. It will help you to achieve your life goals quickly.

Note – Impact of Time and Rate will be much bigger for amounts more than this example and time longer than we have taken in this example.