A lot of women I know don’t take saving or investing seriously because they believe that they don’t ‘have enough’ to save, or they think what they save will never grow into a considerable amount - an amount that will inspire or push them to save.
What if I told you that ₹5,000/- a month can grow into ₹20 lakhs in 10 years? Or ₹1 Crore in 20 years? It might seem absurd, but it is possible if you pick the right investment and are willing to take on some risks.
The Magic Of Compounding
Knowing how compounding works is essential when it comes to saving effectively. Let’s say you have ₹100 and you’ve put it in a year-long deposit that earns 10% interest. At the end of the year, you’d have ₹110 - the original ₹100 that you put in, and ₹10 as interest.
If you put in this ₹110 into the same deposit again, you’d earn ₹11 (10% Of ₹110) the next year and have ₹121, and ₹121 the year after to give you ₹133.
This is how compounding works - the interest earned is added to the original amount and interest is calculated afresh on this amount.
The upside of compounding is that your money grows at a faster rate than a deposit where interest is paid out, or a dividend payout plan of a Mutual fund. The only downside is that you won’t receive an income, but compounding is the best way to save for retirement, education, or any other event that requires a considerable corpus because it takes a little sum a long way.
Rate and Time
A monthly instalment growing into a corpus depends on two things - the rate of return (or interest), and the time period for which you’re planning to save. The longer the time period and the higher the rate, the bigger your corpus.
₹1 Crore in 20 years?
If you save ₹5,000 a month, it works to ₹60,000 a year. Let’s say you choose an investment that will give you 20% return annually. By the end of the year, you would have earned ₹12,000, and that comes up to a total of ₹72,000. Now this ₹72,000 will earn interest and become ₹86,400 the next year, and ₹1,03,860 the year after and so on.
However, if you keep infusing your initial investment with ₹60,000/- every year, you are going to repeat this cycle of earnings and accumulate it into your overall investment. Assuming you invest ₹60,000/- every year at a steady earnings rate of 20% you will be sitting pretty on approximately ₹20 lakhs in 10 years and after 20 years, close to ₹1.3 Crores! Even if you stop investing after the first year, your initial ₹60,000 would have become ₹23 Lakhs at the end of 20 years.
What Investments Do I Choose?
Once again, I will reiterate that the end amount is a function of the time that you want to save and the rate of earnings. A steady earnings rate of 20% is not possible when you pick a ‘safe’ investment like an FD (8%) or an RD (~9%). You will have to look at equity Mutual Funds instead, which carry a component of risk but then again, what is reward without risk? Alternatively, if you have a little more time, you can pick a comparatively lower risk investment that offers a lower rate of return. You will reach your goal but at the cost of a few extra years.
Compounding is proof that no amount is too small or too insignificant to make an impact. If you have an appetite for risk and the time outlay to save, ₹5,000/- is all you need to become a crorepati in the future.
Rupee Rani is a weekly column on finance for women. Write to us with your queries at rupeerani@thenewsminute.com.