Ajay and Vijay, two friends, started working at 23. Both of them drew a post-tax salary of Rs.30,000 per month. Out of the two friends, Ajay was more money conscious and started investing Rs.12,500 from the first month itself and continued this process until he turned 65. On the other hand, Vijay, who is less money-conscious compared with his friend, decided to enjoy the money by spending more until he turned 33. At that age, that fact that he had no savings left dawned on him. Thus, henceforth, he too started investing Rs.12,500 per month. Moreover, just like his friend Ajay, Vijay continued with the investment process until he turned 65. The point that needs to be noted is that Ajay and Vijay continued this process of investing the same amount of Rs.12,500 per month without withdrawing any amounts for the entire duration. Both friends retired at 65.
Now, let us assume the rate of return as 10% p.a. for the entire duration. Further, let us assume that both of them are investing in equity stocks or equity mutual funds since only these asset classes can provide them with returns that beat inflation in the long term.
At the time of retirement, based on the assumed rate of return, Ajay received Rs.9.68 crores as his retirement fund while Vijay received only Rs.2.82 crores. Total investment made by Ajay was Rs 63 lacs whereas for Vijay it was Rs 45 Lacs. The point we need to watch out for here is that although the amount invested by Ajay was only 40% higher than that of Vijay, the amount received by Ajay was 243% higher than the amount received by Vijay. The main reason for this is that Ajay invested for 42 years and Vijay invested for 30 years. Thus, the power of compounding worked better for Ajay compared with his friend Vijay. Furthermore, since Vijay started to invest much later than Ajay, he got a much lower amount at retirement.
*Example of Ajay investing for 42 years
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