Earning money is one thing, but investing it at the right place and at the right time is a completely different art. Generally people remain confused as to how much amount will be sufficient for investment, whereas the biggest truth of the financial market is at what age you start investing. If you postpone your investment decision by just five years, then in future this small delay can cause a huge loss of about Rs 3 crore on your retirement fund.
Direct connection between age and investment
Let us understand this with a practical example. Suppose, there are two young employees – Ayushi and Ayush. Both have almost equal income and both decide to start a Systematic Investment Plan (SIP) of Rs 10,000 every month to secure their future. Here the only and biggest difference between the two is age. Ayushi enters the investment field at the age of 25, whereas Ayush takes the same decision at the age of 30. If we assume an estimated annual return of 12 percent on the investments of both, then initially there is not much difference visible in the portfolios of both. The amount increases slowly and it seems that the profit of both will remain the same. But as retirement time approaches, this gap of five years turns into a huge gulf.
How investment of Rs 36 lakh reached Rs 3.5 crore
When both of them withdraw their funds at the age of 60, the financial results are surprising. Starting at the age of 30, Ayush’s total investment in 30 years is Rs 36 lakh and his final fund reaches around Rs 3.52 crore. At the same time, Ayushi, who started investing at the age of 25, invests a total of Rs 42 lakh in 35 years, but her retirement fund becomes Rs 6.49 crore.
That means Ayushi gets the reward of starting investment just five years ago in the form of additional profit of about Rs 3 crore. This miracle is not possible through any overnight scheme, but through the power of compounding. The real effect of compounding is most visible in the last years of the investment period rather than the first 10-15 years. The more late a person starts investing, the more he loses this most profitable phase of compounding. For example, if the same investment is started at the age of 35, then by the time of retirement the person’s fund will remain only Rs 1.9 crore.
This is how to avoid the blow of inflation
On paper, an amount of Rs 6.4 crore or Rs 3.5 crore may seem huge today, but ignoring inflation while making financial plans would be a serious mistake. If we assume an average inflation rate of 6 percent for the future, then after 30-35 years from now the purchasing power of Rs 3.5 crore will be equal to Rs 61 lakh today. Similarly, the real value of Rs 6.4 crore in future will be around Rs 1.07 crore today. The power of money decreases with time.
In such a situation, just starting SIP of a fixed amount is not enough for financial security. To deal with this challenge, the strategy of ‘Step-up SIP’ should be adopted. This simply means increasing your investment amount by about 10 percent every year. This strategy not only keeps your investments ahead of inflation, but also creates a strong retirement fund that can withstand every economic challenge.
Also read: HDFC or SBI: If you invest money in shares of which bank, you will get huge income!