A lot of people must have told you what my parents had drilled down in me during my student days.
It is that you must find a promising career that pays you a decent living so that you can live happily ever after.
But they may not have told you that in the long run, it’s not just how much money you make that will determine your future prosperity.
It’s how much of that money you put to work by saving and investing it.
You see, the best time to start investing is when you are young.
The more time you have to let your investments grow, the bigger the fortune you’ll end up with.
Let us understand this using some calculations.
Let us assume you are just starting out with your investments, and need to collect Rs 1 crore in wealth when you retire at 50 years of age (yes, you’ve promised your wife that you will retire at 50!)
Also, you have the ability to invest only Rs 5,000 per month.
If you are 25 years of age now, you have 25 more years to earn, save, and invest Rs 5,000 per month.
My calculations show that to meet the target of Rs 1 crore when you reach 50 years of age, the annual rate of return at which your investments must grow at, is 12.3%.
This is very much achievable, given that Indian stock markets have generated average returns of around 18% per year over the past 30 years. So expecting just 12.3% average returns over the next 25 years isn’t unbelievable.
Anyways, things look a bit different if you are already 30 years of age, and have just 20 years to earn, save, and invest Rs 5,000 per month.
To reach Rs 1 crore when you are 50, your investments must grow at almost 17% per annum. Even this sounds achievable.
But what happens if you are now 35 years of age, and thus have 15 years to retirement?
Your Rs 5,000 monthly investment must now grow at 25% per annum for you to reach Rs 1 crore in 15 years. Seems very difficult!
And what happens if you are now 40, and have just 10 years to invest and collect Rs 1 crore?
Forget it, because your annual rate of return must now be 43%. Not achievable…unless you have some magic crystal ball that tells you which stock is going to be the next Infosys!
The equation gets even worse if you have just 5 years remaining to reach 50. Your money now needs to grow at 106.5% annually!
Stay out of the stock markets and try your hands somewhere else. Like the casino or betting on horse races?
See, you can argue that this doesn’t work as anyone can increase the amount of monthly investment from Rs 5,000 to Rs 10,000 in the future, and thus the expected rate of future return would fall.
Yes, this is very much possible, but the main idea behind my calculations is not to say that you can’t make Rs 1 crore investing for just 10 years.
What I want to put across is that with limited financial resources, which most families in India have, and ever-increasing aspirations, the goal becomes tougher the later we start investing.
Seriously, you see everywhere that people are living much longer than they used to, which means they’ll be paying bills for a lot longer than they used to.
In order to cover their living expenses after retirement and for meeting their other financial goals, they’ll need extra money. And the surest way to get it is by investing, and starting as soon as possible.
Should I start investing now?
“The stock markets are too volatile. Is this the right time to invest?” you may ask.
See, it doesn’t pay to look for the ‘best time to invest’ unless you have this divine knowledge that you are going to be very lucky with your investments.
The best course of action for most of us is to create an appropriate investment plan and take action on that plan as soon as possible.
It’s nearly impossible to accurately identify market bottoms on a regular basis. So, realistically, the best action that a long-term investor can take is to invest in a systematic, disciplined way, regardless of the level of the stock market.
Of course, the stocks or mutual funds you buy must be of good quality, and which aren’t going to destroy your capital.
But do it now. Now, as in, NOW!