You can read this to understand. Why do you need to invest?
Assume you earn 50K per month, of which, you spend 30K towards the cost of living, and therefore left with 20K in surplus every month. If you choose not to invest this monthly surplus, your cash will be left as it is.
Now, the question is, at this rate, how much money will you have by the time you retire? For the sake of simplicity, let us ignore the effect of tax and make a few assumptions –
· Your employer is kind enough to give you 10% salary hike every year.
· The cost of living increases by 8% year-on-year.
· You are 30 Years old (now) and plan to retire at the age of 50, this implies you have 20 working years left.
· You don’t intend to work post-retirement.
· Your expenses are fixed and don’t foresee any other expense.
· The balance cash of 20K per month is retained in the form of cash, probably in your bank’s saving account.
Take some time, maybe get a pen and paper and do the math. At this rate, can you work out the amount of money you would be left with by the time you retire?
Here is the math –
· 1st year you earn Rs.6,00,000/- i.e. Rs.50,000 per month * 12 months.
· Your early expenses are Rs.3,60,000/- i.e. Rs.30,000 per month * 12 months.
· Your yearly savings is Rs.2,40,000/- i.e. Rs.20,000 per month * 12 months.
· The 2nd year you get a hike of 10%, so you earn Rs.6,60,000/-.
· The expenses increase by 8% so do the retained cash.
· So, on and so forth.
The numbers are quite scary and here is why -
- After 20 years of hard work you accumulate 1.7Crs.
- Expenses are fixed, your lifestyle has not changed over the years, you probably even suppressed your lifelong aspirations – better home, a better car, international vacations etc.
- Post-retirement, assuming the expenses will continue to grow at 8%. 1.7Crs is good enough to sail you through roughly 8 years of post-retirement of life. 8th year onwards, you are likely in a very tight spot with literally no savings left to back you up.
What would you do after you run out of all the money in 8 years’ time? How do you fund your life? Is there a way to ensure that you collect a larger sum at the end of 20 years?
Now consider this, instead of keeping the cash idle, you choose to invest the cash in an investment option which grows at 12% per annum. For example, the end of the 1st year you retained 2,40K which you decide to invest at 12% for the next 19 years. The 2nd year you retained 2,71K, which is again invested at 12% for 18 years, so on and do forth. The table below helps you understand how the numbers grow-
At the end of 19 years, the 1st years’ investment of 240K grows to Rs.20,67,063/-, this is at 12% growth. Likewise, the 2nd year’s investment of 271K grows to Rs.20,85,519/-.
If you add up all the final values, you get a massive corpus of 4.2Crs, which is a whopping 2.4 times higher than what you would have otherwise saved. Clearly, this will happen if you choose not to invest!
You can read this to understand. Why do you need to invest?
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