Compound Your Interest

Personal Finance
Compound Your Interest

By Dhirendra Kumar

Aren't you paranoid about running out of money in your dotage? Everyone else I know is. How strange! The problem, quite simply, is to make each of our limited savings provide a household income that lasts a post-work lifetime. Yet, the standard response is: ''Yes, tomorrow is important. But I'll worry about it tomorrow.'' And you procrastinate because you say you don't have the time, the expertise-or the money to deal with it right away.

Getting up to speed in managing your savings doesn't require you to enrol at B-school. You can get started with, say, as little as Rs 500 per month. At a rate of interest of 10 per cent, compounded monthly, in 30 years, that will grow to more than Rs 10 lakh! Why, you may then start handling all your finances personally.

IT'S ABOUT TIME. No less a mind than Einstein called compound interest ''the most powerful force in the universe.'' Over short periods of time, compounding produces a little extra, but nothing to write home about. Over long periods of time, compounding produces incredible results. Assume you invest Re 1, and earn a 100 per cent return on your investment every day for a month. If you didn't reinvest your earnings each day, you'd finish the month with an additional Rs 30. If you reinvested all your earnings, and let compounding work its magic, you'd wind up with Rs 107.37 crore [Re 1 × (2.00)30].

IT ALWAYS TOO LATE. Because the benefits of compounding increase over time, the importance of starting early cannot be overstated. Let's say you are 25 years old, and you invest Rs 10,000 that returns 10 per cent a year on an average. Your best friend, who is the same age as you are, invests Rs 10,000 in the same investment 5 years later, when he is 30. By the time you both retire at 65, your investment would be worth, approximately Rs 4,52,600. Your friend's investment, though, will be worth only Rs 2,81,000. In other words, while your investment-period was only 15 per cent longer than your friend's, the investment itself ended up being 60 per cent larger.

IT'S NEVER ENOUGH. There's a simple way of looking at financial planning: you only need to ensure that enough cash will be available whenever either you or your loved ones need it, no matter what twists and turns life may take. Exactly what is enough depends, largely, on your values, but that's it. No matter how complex you've believed planning to be, that's what you must try to accomplish. Remember this as you develop a financial plan, especially since the specific steps-investing for your children's education, managing your loans, insuring against death and disability, taxes, estate-planning-can seem daunting.

Of course, more than even a plan, when-and not how much you start out with-is the key to achieving your financial goals. Thanks to that powerful phenomenon called compound interest, time becomes your ally only after you start investing. Procrastinate too long-and you will be confronted by this ugly irony: your worst enemy will be time. So, the sooner you choose to start investing, the better.

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