We believe that starting your investment journey early is key to achieving your financial goals. While starting to invest for retirement in your early 20’s can be advantageous, we recognize that it may not always be possible. You may need to focus on paying down debt, saving for large purchase down payments, or ensuring that you have an emergency fund. However, as soon as you can start investing for retirement, the easier it will be; this is because of the power of compound interest. When comparing the same investment amount but investing earlier versus later in life can result in dramatically different ending values.
For example, if you invest ₹1,000 at a 12% rate of return starting on your 25th birthday. When you turn 65, you will have over ₹93,000. However, if you wait 10 years to invest this ₹1,000, you will have slightly less than ₹30,000 on your 65th birthday. Even worse, if you wait 20 years, your money has far less time to work for you. At 65, your ₹1,000 will have become approximately ₹9,600. 20 years of compound interest provides you nearly 10X the total return.
Putting this in practical terms, if your investment goal is ₹1,00,000, then you nearly reached that by holding an investment for 40 years. If you only held the investment for 20 years, you need to find an additional ₹90,000 to meet your goal.
Here is a simple trick to understand how time can impact your returns; it is called the ‘rule of 72’. Start with your assumption of investment returns – it could be 6%, 15%, or anything you choose. Divide 72 by that number you chose. The number you get from this calculation is the number of years it will take to double your money.
Here is a table that shows a few values:
| Rate of Return | 4% | 8% | 12% | 16% | 20% |
|---|---|---|---|---|---|
| Years to Double (“Rule of 72”) | 18 | 9 | 6 | 4.5 | 4 |
Let’s say you assume an 8% return. Divide 72 by 10 and you will get 9. This means at an 8% average return, every 9 years, your money will double. If you start with ₹100, in 9 years you will have ₹200. In about another 9 years, you will have ₹400. Pretty easy, right?