The Secret To Making Crores ! - Compounding

“Compounding is the eighth wonder of the world.”
- Albert Einstein

“Take away the terms asset allocation, long term and compounding from a financial advisor’s vocabulary, and he is pretty much tongue-tied,” remarks a friend.

Let me show you exactly how much saving can help. Say you spend Rs 40 every day on cigarettes. Let us see what could happen if you stopped smoking.

Let's also make some assumptions (do allow for the fact that all may not be valid). Let us also suppose that these are valid for the next 30 years

Instrument Yield (% pa)
Sensex 18
Equity 21

Smoker’s chart

Money spent per day Rs 40 Rs 80 Rs 120
Money spent per year Rs 14,600 Rs 29,200 Rs 43,800

Money earned if invested over the next 30 years
Sensex Rs 11,547,841 Rs 23,095,681 Rs 34,643,522
Equity Rs 21,099,200 Rs 42,198,399 Rs 63,297,599
PPF Rs 16,53,935 Rs 33,07,870 Rs 49,61,805

Nice chunk of change, eh?!

What would this money be worth? Let's see:

i. You could afford an Ivy League education for your children.
ii. You could buy out your neighbour’s flat, have a roomier home.
iii. You don't need to care how many times your banker looked at your Form 16.

Of course, if you spend Rs 120 per day on cigarettes, you probably won’t live for 30 years!
So you don't smoke? Maybe you're a frequent restaurant-hopper? That would easily mean Rs 2,000 per week.

Keep at it for 30 years, and you would have said goodbye to Rs 15 crore.
Think of the penthouses you could have afforded with that kind of moolah!

Gastronome’s chart

Money spent per week Rs 750 Rs 1,500 Rs 2,000
Money spent per year Rs 39,000 Rs 78,000 Rs 104,000

Money earned if invested over next 30 years
Sensex Rs 30,846,972 Rs 61,693,943 Rs 82,258,591
Equity Rs 56,360,876 Rs 112,721,752 Rs 150,295,669
PPF Rs 44,18,045 Rs 88,36,090 Rs 11,781,454

Don't fit into the smoker or the gastronome's category? But you have one weakness: you love shopping. Say you spend about Rs 10,000 per month on retail therapy.

Hmm. Over 30 years, a Rs 10,000 investment in an equity fund could fetch you Rs 17 crore. I won't even go into what you can do with that kind of money!

Shopper’s chart

Money spent per week Rs 3,500 Rs 5,000 Rs 10,000
Money spent per year Rs 42,000 Rs 60,000 Rs 120,000

Money earned if invested over next 30 years
Sensex Rs 33,219,816 Rs 47,456,879 Rs 94,913,759
Equity Rs 60,696,328 Rs 86,709,040 Rs 173,418,080
PPF Rs 47,57,895 Rs 67,96,993 Rs 13,593,985

Why do you think the otherwise smart, educated people fail to understand this?

Allow me to tell you what I think:

Your life is a function of your habits, not commonsense. It's tough to change your habits. Consider this: most smokers know the damage that 54,750 cigarettes can do to their health. But that 'one' cigarette never seems to matter. Ditto for that 'just one' Coke or chocolate.

Most people don't care about small numbers, and wait for that big amount to come by for them to save.

Funny thing is, if I tell you saving money is very simple and needs very simple methods to make large amounts of money, most people, including you would laugh at me.

But it's just so easy. Start small. Start simple. Save big!

They need complicated tools – day trading, brokerage accounts, futures and options, etc.

When you tell them that they can make a lot of money by just being disciplined they will just not believe it!