When to start investing?
Where to invest?
In order to answer these, let’s go through a few scenarios.
Let’s first consider a scenario of a young professional, starting his/her professional journey from a modest beginning. Our Mr/Ms X is not a high-flier, who is starting with the highest paying job in the market.
Scenario 1: The person is starting with regular work, which is not a high paying dream-job, but an average one with a modest Rs 5 Lakh per annum package. Similarly, the person also does not have very high expenditure, but a modest expenditure of Rs 3 Lakh per annum, which is meeting the daily needs. Also, assume that the person continues to maintain the salaried status for part of his/her entire professional journey for next 40 years. The average increment is received at 10% per annum. During the entire duration, the inflation remains around 6% per annum and the person maintains 3% per annum improvement on lifestyle. The person starts with a disposable income of Rs 2 Lakh per annum and by the end of 40 years of his/her professional life, the person saves Rs 11 Crores in the kitty.
Scenario 2: However, the previous scenario is highly uncommon. The person will definitely go through various changes in lifestyle throughout his/her career, due to various lifestyle events. The person will buy a vehicle, invest in housing, get married, have children, spend on their education, and so forth. All these will bring certain step-changes in lifestyle expenses. Considering at least 5 lifestyle changes, expenses will be increased somewhere around 15-25% in a particular year. This means, after 40 years, the person can only have a kitty of Rs 3 Cr — about one fourth of the kitty which was accumulated in Scenario 1 (ideal case).
Scenario 3: While Scenario 2 indicates a likely situation, there are other aspects as well. While an increment of 10% is considered for the entire duration, it is likely that the person may change his/her job or get special recognition for hard work. Thus, it is likely that the person gets higher increment for some specific years. Considering such a situation happens every 5 years, the increment received is 15%, instead of 10%. Keeping everything same, like in Scenario 2, this hard-working individual can accumulate Rs 10.5 Cr in the kitty, after 40 years.
Scenario 4: Every coin has two sides. While one side can indicate an uptrend of income, the other side can indicate a downtrend. This means, that it is not only the bonuses or the increase due to change in job that counts, there is another possibility as well. It is possible to have lower increment for few years, or break in service due to economic downturn. The recent COVID pandemic indicated that it is important to plan for such an eventuality in the planning process. Thus, the Scenario 3 is revised to indicate low increment of 5% for every 5 years. Adding this eventuality to our plan will reduce the accumulation to Rs 4.3 Cr, after the same 40 years duration.
With all the eventualities, it seems that Scenario 4 is the most likely possibility. And it is this scenario, which indicates the need for savings and investment. Here we can assume that the disposable income is being kept in the bank savings or fixed account, which returns 3-6% per annum, which barely meets the inflation. Thus with traditional bank FD, the return is inflation-neutral. And this inflation-neutral return will help the individual to accumulate Rs 4.3 Cr, after 40 years.
If the same disposable income is invested properly, to generate 5% more than the bank FD, then the result will show 100% increase in accumulation — with a total of Rs 8.9 Cr. This 5% extra in absolute terms provides a return of 11%, which can be a decent target. Managing these year after year in a disciplined manner is the key. And thus is the power of compounding. This power of compounding addresses the second question, when to start — the answer is immediately.
1 Why invest? To get a higher yield to the disposable income. The higher yield can be 70-100% more than inflation – as an average.
2 When to start investing? Start immediately, as long as one starts earning.