Early Start A Key To Wealth Creation :

If there is one reason why some individuals end up with more savings, it is because of an early start. Setting aside money regularly from an early age helps create significant wealth. Those who delay saving find it difficult to catch up later even after increasing their investments significantly.

Delaying your investments is a costly mistake in the words of Warren Buffet – the investment guru.

When asked in a TV show about ‘the biggest mistake we make when it comes to money’, Warren Buffet revealed:

“Well, I think the biggest mistake is not learning the habits of saving properly early. Because saving is a habit and then, trying to get rich quick. It's pretty easy to get well-to-do slowly. But it's not easy to get rich quick.”

The big mistake investors make when it comes to saving is postponing. They underestimate the importance of time in wealth creation. They think they can always save later and make up for lost time.

Importance of a head start in saving :

To understand this better, let us take two colleagues – Sameer and Rahul, both 30 years old. They earn approximately the same salary - ` 25,000 a month.

Sameer is the extravagant type, very happy go-lucky. Always looking at spending money, if he is lucky he saves some money at the end of every month. As you can guess, his savings are negligible.

Rahul is the no-nonsense disciplinarian when it comes to finances. He believes in the ‘saving first and spending later’ policy. As part of his savings plan for a house, he sets aside 20% of his salary (` 5,000) towards an SIP (systematic investment plan) in an equity fund.

For ease of calculation let us assume Rahul invests ` 5,000 over a period of 30 years although his salary will increase over the years.

Sameer realizes rather belatedly that he was wrong in pursuing a high consumption lifestyle and should have saved money instead. He takes up the matter with some urgency and like his friend Rahul decides to begin an SIP with ` 5,000 per month. A point worth noting is that Sameer begins investing 10 years later than Rahul, so he has a 20 year investment time frame.

Rahul takes the early bird offer

Details	Rahul	Sameer
Monthly SIP	`5,000	`5,000
Assumed rate of return (CAGR)	12%	12%
Investment period (months)	360	240
Value of investment at end of tenure	`1,74,74,821	`49,46,277
The mistake of starting later has cost Sameer		`1,25,28,544

(Rate of return on the equity fund is assumed to be 12% CAGR)

Sameer’s ‘mistake’ of starting the savings plan 10 years later than Rahul proves very costly – it has cost him over ` 12.5 million (or ` 1.25 crores).

When Sameer sees the projected returns and how much the delay has cost him, he is very upset. Not wanting to be left behind, he doubles his SIP amount to ` 10,000/month for a period of 20 years so as to catch up with Rahul.

Does Sameer succeed in catching up with Rahul?

Details	Rahul	Sameer
Monthly SIP	`5,000	`10,000
Assumed rate of return (CAGR)	12%	12%
Investment period (months)	360	240
Value of investment at end of tenure	`1,74,74,821	`98,92,554
The mistake of starting later has cost Sameer		`75,82,267

(Rate of return on the equity fund is assumed to be 12% CAGR)

Doubling his investment to ` 10,000/month does not help Sameer. It does of course reduce the gap between the two colleagues, but Sameer is still behind Rahul. His delay now costs him more than ` 7.5 million or ` 75 lakhs. 

What this tells you

The unmistakable lesson from the illustration is that Sameer made a mistake in delaying his investment by 10 years. This has proved so damaging that undoing the delay is proving next to impossible. Of course, Sameer could triple or even quadruple his investment to catch up with Rahul but that is not practical in real life.

However, what is practical for investors is to start early on. It’s the time that matters, not the amount. Rahul benefited from the 10 year head start over Sameer with a modest SIP contribution.

You can start small, but you must be regular in saving money. This is the most important habit to cultivate from a very early age, both in yourself and your children.  You can always increase the amount over the years with a rise in income.

Information Courtesy : Karvy Value Blogs