We do not truly understand the power of compounding until we experience it and by then it is too late to capture lost time
By Amar Pandit
When we start earning, the last thing on our mind is planning finances and preparing for the future. We are excited to finally earn our own paycheck and find multiple ways to splurge our money. As we grow older and the need to take on more responsibilities increase, we begin to broaden our horizons and plan ahead.
But what we may not realise is that we will never get back the time we have lost. In the investment world, time is as important as money. In fact, time creates money.
Power of compounding
In investment terminology, time refers to the power of compounding. It implies that our savings, when invested, have the power to grow exponentially. It may start slow, but with time the returns pick up and are eventually unstoppable.
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Let’s use an example to illustrate just how advantageous it is to harness this power. If you invest Rs 10,000 in a monthly SIP at an interest rate of 14%, in 10 years you can earn Rs 25,90,689. Delaying it by days, months and/or years could cost you a lot. (See graphic)
The cost of delaying investment decisions by even a month would encourage any investor to not waste a single minute. So why do we procrastinate with our investment decisions, when we stand to lose so much? We do not truly understand the power of compounding up until we experience it and by then it is too late to capture lost time.
Another reason why we delay making investments is because we try to time the market. We want to ensure that any investment instrument that we choose to add or remove from our portfolio is bought or sold at the right price. Terrified of making the wrong call, we just stand by and don’t make any call. But there is no such thing as timing the market. Waiting for the market’s best days will just erode our returns in the long run.
Invest through SIP
Instead, avoid making lump sum investments and go for SIPs. The SIP is designed in a way that the periodic investments average out the cost of investing, whilst ensuring that we do not miss out on lucrative opportunities when the market is favourable.
Many of us believe that once we have invested, our job is done. But as our life situation changes, our financial goals tend to evolve. If we do not review them from time to time, we could miss the mark on achieving our goals. Therefore, we should make it a habit to continuously review and make changes to the investments as and when our financial goals evolve.
The other downside of delaying investments, is the haste we find ourselves in when we do start to invest. To make up for lost time and money, we make hurried decisions that could cost us dearly. Instead, when investing, it is prudent to consult a financial expert who will guide us.
The writer is founder, Happyness Factory