- The amount invested every month/year
- Rate of returns
- Time period the amount stays invested
A disciplined approach towards saving and sensible investing choices will take you to your first crore as long as you allow compounding to do its magic. If you were to save and invest Rs 50,000 per year (which is slightly more than Rs 4,000 per month) you could become a crorepati in 25 years.
1. Amount invested every month/year
It's intuitive that the more you are able to save and invest today, the larger your reward will be down the road. However, this table shows that even the smallest addition to your savings each year can make a big difference in reaching your targeted amount.
|Amount invested per year (Rs)|
(assumed rate of returns at 12%)
|Value after 25 years|
2. Rate of return
The rate of return (the amount you earn on your savings) has a huge impact on the amount of money you'll end up with. Different investment vehicles have different expected returns. For example, Indian stocks have historically returned more than 15 per cent per year. Cash, in contrast, has a current return of 8-9 per cent per year. Your goal is to find a rate of return that offers the highest potential for growth, but at the lowest possible potential for risk of loss. Over time, we have found that the most prudent solution is a diversified combination of investment assets (stocks, bonds, cash, real estate, and alternative investments).
Assuming that you could invest Rs 100 at 11 per cent per year, you would have Rs 1,359 at the end of 25 years. However, if you were able to invest Rs 100 at 15 per cent per year, you would have Rs 3,292 after 25 years.
|Year||5% (in Rs)||11% (in Rs)||15% (in Rs)|
3. Time period the amount stays invested
To illustrate the power of compounding over time, please refer to the tables below. In the first example, Rs 2,000 was saved and invested each year from age 19 to 26 (for a total of eight contributions). In the second example, Rs 2,000 was saved and invested each year from age 27 to 65 (for a total of 39 contributions). At age 65, the first example ended up with Rs 1,019,161 (vs. Rs 805,185 in the second example), even though the total amount contributed over the eight-year period was only Rs 16,000. The reason? The first example had eight more critical years to invest at the same rate of return at the beginning of the investment period. That's the power of compounding!
|Example 1||Example 2|
|Minus amount invested||16,000||78,000|
|How much the amount has increased by||64 times||10 times|
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