Early Investing Benefits all

“Most great fortunes are built slowly. They are based on the principle of compound interest, what Albert Einstein called, The greatest power in the universe.” Brian Tracy

Aged 59, Upendra Yadav from Saptari village of Madesh Pradesh saw rich people getting richer without any effort and poor becoming poorer despite their tremendous efforts as time goes by. Upendra asked himself “What causes this discrepancy?” as he sat on his newly bought sofa on Laxmi Puja from Biratnagar. He then scratched his head and lay on his back on the sofa but couldn’t find the answer to his nagging question. A couple of days later his high-school classmate Siddharth came over to his house to invite him personally for his 60^th birthday. Siddharth is a rich guy who has established a profitable business empire and deserved respect for his business acumen.

Upendra said to Siddharth, “Dear friend, Thanks for inviting me for your 60^th birthday. Since you are rich and I am poor, how can I attend your birthday party empty-handed?” 

Siddharth replied, “My friend, you don’t need to bring anything for the birthday party. Actually, I want to celebrate your contribution to my life and give a big thanks to you.”

Upendra was surprised to hear his contribution and asked Siddharth, “ what kind of contribution? Why do you want to give me a big thanks since I haven’t done anything for you.”

Siddharth replied, “Well Upendra you might not remember now but you taught me a very important lesson in life when I was in high school. Because of your teaching in combination with my discipline, I learned the value of compounding which helped me to accumulate an enormous amount of wealth that I never imagined.”

Upendra was shocked and said, “Siddharth, could you please explain what I taught back in high school since I have poor memory and don’t remember it.” 

Siddharth smiled… “Of course my friend, I will explain in depth what you taught us” 

My dear friend, you presented the high-school project with the title “the power of compounding”. I really loved this topic to date. It changed my life entirely and it might change yours too! Compounding is a process by which money grows exponentially due to interest adding continuously upon itself over time. It takes time to feel the real effects of compounding. As the force of compounding plays in favor of you benefits originating from it are enormous.

Let’s compare two different cases:

Case 1: If you start saving a small fortune of Rs. 20,000 per year (≈ Rs. 1667/month) at the early age of 16 and continued till age 32 and then stopped. 

Case 2: you started saving a lot later at the age of 32 till age 60 with a large sum of money Rs. 70,000 per year (≈ Rs. 5834/month).  

Who will have more money saved up at the end?

Case 1 or 2?

The saving benefits are impressive in both cases but the impact is deeper in the former case as shown in a spreadsheet below. In fact, case 1 end up saving more money than case 2 despite the low saving rate.

As you can see from the spreadsheet chart when you start saving from the early age of 16 till age 32, you are basically depositing a small fortune totaling 340000 (Rs. 20,000 only 17 times) in the bank and the rest of the money 11826426-340000 = 11486426 was self-earned interest by your deposited money as it compounded over a period of 45 years to make an astounding sum of money one crore eighteen lacks twenty-six thousand four hundred twenty-six as summarized in a chart below. Note that for the 1^st deposit year interest was a mere 2000 in Case 1 but fast forward to the 45th year, and your interest has grown to 1075130 just in a single year. The actual hard cash deposited here in case 1 was three lakh forty thousand only.

On the other hand, when you wait and start saving a lot later from age 32 till 60, you are depositing total hard cash of 2030000 (Rs. 70,000 only 29 times) in the bank. The total interest earned at the end was 10505112-2030000 = 8475112 which is lower compared to the previous case. In case 1, money was allowed to compound for 45 years whereas in case 2 it was given only 29 years. As a result, net interest income suffers despite the fact that you deposited 5.97 times more money in case 2.  

Therefore, the key factor is the time period. Longer the time you allowed your saving to compound larger the paycheck you get at the end. The force of compounding works magic if you give it a long time to act.

Now that Siddharth finished his discussion, Upendra realized something that compound interest is one crucial part of the answer he was looking for. He hugged his friend genuinely and said to him I accept your invitation and will definitely attend your birthday party. Siddharth cordially thanked his friend for accepting the invitation and said, “Goodbye Upendra, Have a nice day!”

Did you know?

How much your Rupee 1 (or $ 1) invested at a different time would be worth at age 60?

It is highly advisable to save early because there is the important factor of time in favor of you for compounding to work. Your savings made at a young age would supplement your social security benefits that you get later in life. Many older folks I met jokingly say they are getting bridhha vatta and have no need to save money because the government is their ATM and saves for them. What they said is true in one sense but you don’t know when the government changes policy and reduces or stop payouts totally. Life might be tough for older folks then. Beware!

Also, don’t get super excited about the math shown above. In real life, you have to pay different types of fees such as commissions, taxes, service charges, etc. These slightly lower your expected payouts. In addition, inflation would eat away the value of your money. The best thing is that you could probably get better returns than predicted in the table if you invest money in your country’s stock market by choosing reliable and best-performing stocks. The average dividend payout for the Nepalese stock market i.e., NEPSE stands around 20% per annum but the calculation shown above is for a 10% interest rate per annum.