Power of Compounding: How can you create Rs 5 crore, 6 crore, 7 crore corpuses if your monthly salary is Rs 20,000?
Power of Compounding: Starting salary is Rs 20,000 and dreaming of a Rs 7 crore corpus? Sound too ambitious? But any ambition can be achieved if it is realistic. So, creating a Rs 7 crore corpus from a starting monthly salary of Rs 20,000 is very much within reach if one plans meticulously and sticks to their investment for a long time.
Power of Compounding: A person starting a job has some monthly salary. It can be Rs 15,000, Rs 1.5 lakh, or higher. But when the salary is in a lower bracket, the thought of saving money for the earner becomes secondary, and the thought of investing appears to be impossible. The primary excuse for such a person is that even if I save some money and invest it, I won't be able to create a substantial amount that can fulfill some of my financial goals. But such people have not realised the power of compounding, where even a small monthly investment can create a giant retirement corpus if they invest for the long term. Compounding rewards an investor who keeps the habit of investing above everything. For such a person, creating a corpus of Rs 7 crore with a starting monthly salary of Rs 20,000 is not impossible. How is it possible? Follow the article to know!
Photos: Unsplash/Pixabay
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What is a small or big investment?
For a person earning Rs 1 lakh a month, an investment of Rs 5,000 may appear to be small; for a person earning Rs 20,000, it may be big. But in an extreme case, it may be opposite too. So, it will always depend on the financial goal one wants to achieve through investing.
How can person investing Rs 1,000 a month dream of large corpus?
They need to begin their investment journey early in life and let compounding do its work to grow their corpus exponentially in the long run. As their income increases, they can also boost their monthly investment. Let's see a couple of examples of how their wealth can grow with a Rs 1,000 monthly SIP investment.
How can person investing Rs 1,000 a month dream of large corpus?
If one invests Rs 1,000 through an SIP for 40 years, they will invest 4,80,000 during that period. Now a Rs 4,80,000 investment in 40 years doesn't seem to be high.
But even if they get a 12 per cent annualised return on this investment, their estimated corpus will be Rs 1,18,82,420.
How can person investing Rs 1,000 a month dream of large corpus?
Now imagine the person starting an investment of Rs 1,000 monthly through SIP decides to increase the amount by 5 per cent every year and expects to get a 12 per cent annualised return. Let's see how large a corpus they can generate in 40 years.
In 40 years, they will invest Rs 14,49,597, but their expected corpus will grow to Rs 1,86,08,780. It is nearly 13 times the investment amount.
A 40-year is a long term here. But the impact of compounding is more visible in the long term.
How can a person with Rs 20,000 generate Rs 5 cr, Rs 6 cr, and Rs 7 cr corpuses
We assume that the person will invest 20 per cent of their monthly salary. For a person earning Rs 20,000, it can be Rs 4,000.
Where can they invest?
They can invest in any investment instrument where they get a 12 per cent annualised return. It can also be a mutual fund SIP.
What do they need to do now?
As we know that the salary of a person most likely increases with time, we expect the person to increase their investment amount by 5 per cent every year.
From Rs 4,000 monthly SIP to Rs 5 crore corpus
It will take approximately 37 years to achieve this target.
From Rs 4,000 monthly SIP to Rs 5 crore corpus
In 37 years, the investment will be Rs 48,78,151; estimated capital gains will be Rs 4,63,72,112, and the expected retirement corpus will be Rs 5,12,50,263.
From Rs 4,000 monthly SIP to Rs 6 crore corpus
The target can be achieved in a little over 38 years.
From Rs 4,000 monthly SIP to Rs 6 crore corpus
In 39 years, the investment will be Rs 54,76,561, estimated capital gains will be Rs 6,02,75,961, and the expected retirement corpus will be Rs 6,57,52,522.
From Rs 4,000 monthly SIP to Rs 7 crore corpus
It will take approximately 40 years to achieve the target.
From Rs 4,000 monthly SIP to Rs 7 crore corpus
In 40 years, the investment will be Rs 57,98,389, estimated capital gains will be Rs 6,86,36,732, and the expected retirement corpus will be Rs 7,44,35,121.
What are learnings?
First, see how the estimated corpus is growing from the 37th year to the 40th year—from Rs 5,12,50,263 to Rs 7,44,35,121 with just an extra investment of Rs 9,20,238. It happens because the longer the investment duration, the faster the corpus grows.
The second learning is that even if your investment amount is low, you start investing early and need to make an investment for a long time.