Want to be rich? Read this!

These days, there are a lot of opportunities for youngsters to earn during their college time or after completion of studies. But most of them spend all their money without saving anything.

It always pays to save extra money for your later years that may be used for big ticket purchase like buying house, car, family needs, and higher studies. It can be used for retirement years when you will depend on your savings.

Normally youngsters think that retirement planning needs to be done when you reach 40 or above. Why they should start thinking of retirement savings when they are just 25 years old?

Normally people work about 40 years from age of 25 years to 65 years. During these 40 years they need to provide for assets like a house, good education for the children, some insurance, maybe a car, etc.

They need to spend money on vacations, medical needs for family, marriage, etc. On top of all these expenses, they need to save for 25 years of retired life (from age 65 years to 90 years).

During retired life you will need the same amount of money or even more due to medical expenses, vacations and -- most important -- inflation.

Assume that an age of 65 you need Rs 30,000 for monthly expenses. Then by age of 80 you will need at least Rs 25,000 to maintain a similar life style at zero per cent inflation. Considering 5 per cent inflation, you will need at least Rs 67,000 for monthly expenses to maintain a similar lifestyle.

All these expenses will be met through income earned during your working life. So more money saved during working life, better will be retired life.

You may argue that during the initial years in your career, one earns less. Thus, one cannot save more money. But during later years of life one earns more so one will be able to save more money. So why should you start saving some money earlier in your career, when you can save a lot more later in life?

The following example will explain why investing smaller amounts earlier in life is better than saving big amounts later in life.

Namit is careful spender and he ensures to save at least Rs 10,000 every year. Namit starts saving Rs 10,000 every year at age of 25 years. He invests money in various investment instruments like PPF, mutual funds, stocks, property and earns an average 15 per cent compound annual return.

He saves only till age of 40 and then he stops saving due to family obligations like higher studies for children, children's marriage, buying a house and a car.

Gagan, on the other hand, spends all his income during initial years and he is not bothered about retirement planning. When Gagan turns 40 years, he realises that he need to start saving for retirement too.

Gagan starts saving Rs 80,000 every year at age 40. He invests money in various investment instruments like PPF, mutual funds, stocks, property and earns an average 15 per cent compound annual return.

Both Namit and Gagan retire when they get 65 years old. So they are not able to invest any extra money for retirement after 65 years age.

At age 65, who will have more money? Your initial guess will be that Gagan will have more money because:

1. Namit was saving just Rs 10,000 every year while Gagan was saving Rs 80,000 every year.

2. Namit saved money for just 15 years (from age 25 to 40). But Gagan saved money for 25 years (from age 40 to 65).

You will be surprised to know that Namit will have more money at the age of 65 and Gagan will be far behind compared to Namit.

See the tables below to see how this happens and then read on after the tables too.

Age	Namit saving Rs 10,000 yearly, from age 25 to 40
Age	Amount Invested	Total Amount at year beginning	Interest @15%	Total Amount at year end
25	10,000	10,000	1,500	11,500
26	10,000	21,500	3,225	24,725
27	10,000	34,725	5,209	39,934
28	10,000	49,934	7,490	57,424
29	10,000	67,424	10,114	77,537
30	10,000	87,537	13,131	100,668
31	10,000	110,668	16,600	127,268
32	10,000	137,268	20,590	157,858
33	10,000	167,858	25,179	193,037
34	10,000	203,037	30,456	233,493
35	10,000	243,493	36,524	280,017
36	10,000	290,017	43,503	333,519
37	10,000	343,519	51,528	395,047
38	10,000	405,047	60,757	465,804
39	10,000	475,804	71,371	547,175
40	10,000	557,175	83,576	640,751
41	-	640,751	96,113	736,864
42	-	736,864	110,530	847,393
43	-	847,393	127,109	974,502
44	-	974,502	146,175	1,120,677
45	-	1,120,677	168,102	1,288,779
46	-	1,288,779	193,317	1,482,096
47	-	1,482,096	222,314	1,704,410
48	-	1,704,410	255,662	1,960,072
49	-	1,960,072	294,011	2,254,083
50	-	2,254,083	338,112	2,592,195
51	-	2,592,195	388,829	2,981,024
52	-	2,981,024	447,154	3,428,178
53	-	3,428,178	514,227	3,942,404
54	-	3,942,404	591,361	4,533,765
55	-	4,533,765	680,065	5,213,830
56	-	5,213,830	782,074	5,995,904
57	-	5,995,904	899,386	6,895,290
58	-	6,895,290	1,034,293	7,929,583
59	-	7,929,583	1,189,438	9,119,021
60	-	9,119,021	1,367,853	10,486,874
61	-	10,486,874	1,573,031	12,059,905
62	-	12,059,905	1,808,986	13,868,891
63	-	13,868,891	2,080,334	15,949,225
64	-	15,949,225	2,392,384	18,341,608
65	-	18,341,608	2,751,241	21,092,850

All figures in rupees

Gagan saving Rs 80,000 yearly, from age 40 to 65
Amount Invested	Total Amount at year beginning	Interest @15%	Total Amount at year end
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
-	-	-	-
80,000	80,000	12,000	92,000
80,000	172,000	25,800	197,800
80,000	277,800	41,670	319,470
80,000	399,470	59,921	459,391
80,000	539,391	80,909	620,299
80,000	700,299	105,045	805,344
80,000	885,344	132,802	1,018,146
80,000	1,098,146	164,722	1,262,867
80,000	1,342,867	201,430	1,544,297
80,000	1,624,297	243,645	1,867,942
80,000	1,947,942	292,191	2,240,133
80,000	2,320,133	348,020	2,668,153
80,000	2,748,153	412,223	3,160,376
80,000	3,240,376	486,056	3,726,433
80,000	3,806,433	570,965	4,377,398
80,000	4,457,398	668,610	5,126,007
80,000	5,206,007	780,901	5,986,909
80,000	6,066,909	910,036	6,976,945
80,000	7,056,945	1,058,542	8,115,487
80,000	8,195,487	1,229,323	9,424,810
80,000	9,504,810	1,425,721	10,930,531
80,000	11,010,531	1,651,580	12,662,111
80,000	12,742,111	1,911,317	14,653,427
80,000	14,733,427	2,210,014	16,943,441
80,000	17,023,441	2,553,516	19,576,958

All figures in rupees

Few points to observe

1. Namit invested a total amount of Rs 150,000, whereas Gagan invested total amount of Rs 20,00,000.
2. Gagan invested more than 13 times the amount invested by Namit.
3. Still at retirement age, Namit was Rs 15,15,892 richer than Gagan.
4. At age of 40, Namit was earning more than Rs 80,000 every year just on interest income. So even if Namit was not investing any money from age of 40 onwards, the interest component was taking care of the growth of his investment till he was 65 years old.
5. Due to this, even though Gagan was investing Rs 80,000 every year from age of 40 onwards he will still lag behind Namit forever.
6. Even if Gagan and his family invests Rs 80,000 for next 1,000 years, they will still not be able to beat Namit in terms of total wealth accumulated.
7. After retirement, Namit will continue to get Rs 27,51,241 every year as interest, even though he invested just Rs 150,000.

Conclusion

It always pays to invest early in life. Even if invested amount is very small it can grow big over time due to compounding returns.

The author works with a software company in Bangalore. The opinions expressed here are personal.