How compounding works to your advantage when you start investing early

The power of compounding will work best for the youngest person and even the amount of monthly savings required will be lower when compared to others.

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The longer the duration of savings, more is the power of compounding.

There are some inherent advantages of starting to invest early in life. Not only will you need to invest a lesser amount, you also stand to benefit from the power of compounding. If you have recently started earning, investing a part of your income may not be on top of your mind. But, those who make an early start in saving, stand in a better position to accumulate a sizable amount even with small savings.

Once you start to save early, the returns on the accumulated amount further contribute towards the growth of the corpus. The final maturity amount will depend on how much or number of years your investments are exposed to the growth assets. And, in order to let the money grow over a longer duration, you need to start saving as early as possible.

Here comes the role of compounding. Although compounding refers to earning interest on interest income and works well for fixed-income investments, it can be applied even to market linked savings products. The longer the duration of savings, more is the power of compounding.

Using an example with approximate figures, let us see how starting to save early helps.

Assuming there are three colleagues – aged 25, 30 and 35 years – who wish to retire at age 60 with a corpus of Rs 5 crore each.

A – Age 25

Target Corpus at age 60: Rs 50013572 (5 Crores)

Savings required per month: Rs 7700

Total investment: Rs 3234000 (32.3 Lakhs)

Gain: Rs 46779572 (4.7 Crores)

B – Age 30

Target Corpus at age 60: Rs. 49771784 (5 Crores)

Savings required per month: Rs 14,100

Total investment: Rs 5076000 (50.8 Lakhs)

Gain: Rs 44695784 (4.5 Crores)

C – Age 35

Corpus at age 60: Rs 50287330 (5 Crores)

Savings required per month: Rs 26500

Total investment: Rs 7950000 (79.5 Lakhs)

Gain: Rs 42337330 (4.2 Crores)

Every month A had to save Rs 18800 less than what C had to save for creating the same corpus at an assumed growth of 12 per cent per annum.

As is evident from the table above, one who starts to save early can accumulate the same corpus with 50-75 per cent less savings. Also, because of compounding, nearly 90 per cent of the wealth comprises gains, while for the late investors, it falls to 75-85 per cent.

The power of compounding will work best for the youngest person and even the amount of monthly savings required to get Rs 5 crore will be lower when compared to others.

However, later starters may not feel like being left out. As goes the Chinese proverb – “The best time to plant a tree was 20 years ago. The second-best time is now”. So, make a start right now and begin saving for your goals after estimating the right amount required to invest.

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