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Friday, December 28, 2007

Benefits of Investing Early

"In the Power of Compounding we discussed the importance of time in compounding. In this article we discuss how, because of the power of compounding specially over a long period of time, the difference between starting to invest early versus starting late can have a significant impact on your wealth.

We’ll elaborate this with the help of an example.

Let's compare two friends – Sonia and Peter. Sonia starts saving Rs750 per year from the time she is 15. After 15 years, she stops investing money to her nest egg.

On the other hand, Peter starts investing Rs5,000 per year when he is 30 and continues investing this amount every year till he is 60.

If both earn 15% post-tax return per annum on their investments, who will have more wealth when they retire at age 60?

Sonia. Her Rs750 annual savings between age 15 and 30 will aggregate to Rs27.7 lakhs by age 60, whereas, Peter’s Rs5,000 annual savings between age 30 and 60 will aggregate Rs25 lakhs.

Both will have built up meaningful wealth (compared to their investments). BUT for Sonia to build her wealth, the difference in the annual investment amount and the fewer number of years required for making investments, highlight the importance of starting to invest early.

To summarise, the power of compounding is the single most important reason for you to start investing right now. Remember, every day that your money is invested, is a day that your money is working for you."

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