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Time is the most important asset if you want to make large amounts of money. Start early, as early as possible and you will have more than you need when the time comes.
Ask people what is the most important asset they have in their lives and they are likely to tell you about their investments, that they have a few lacs or crores J here and there in real estate or business or investments … Very few will say that TIME is their biggest investment.
In this article, I will lay the ground for sound long term financial planning by demonstrating how TIME can be your biggest asset in creating a fortune.
Time is one thing that everyone has and is given to all in equal measure – everyday. Now the big difference is in how one use’s it. Those who use it well are endowed with Wealth and those who use if poorly will generally be poor (financially and in other ways).
First think about the important things in your life: your retirement, your children’s education, a house, … Now, how all this is going to cost many lacs right? Now, if you are one of the lucky few reading this, you will learn how with just a few (really few) lacs and lots of TIME on your side, you can have those many lacs.
Now, let’s say you can save just Rs. 1,000/mth (preferably a lot more) on a regular basis. If you do that consistently every month and every year, then the table gives you an idea of what you will have at different rates of return and different time periods.
What is important is not the table but the message it has for all of us. Let’s study the table.
If you invest Rs. 1,000 per month for 5 years (Column A), your total investment is 60,000 (Column B) (i.e 1,000 per month x 12 months x 5 years). Similarly, for 10 years, your investment is 1.2 lacs and for 20 years, it is 2.4 lacs.
Now how much this money grows to will depend on the rate of return you get on your investments. The worst thing to do is leave you money in the savings bank account. Why? - Because it’s just lying there and doing no work for you! Even if it’s there, you get about 4% (actually 3.5%). Fixed Deposits are very popular and they now give you 8% per year. Depending on what type of equity you invest in, one can get 12% per year very easily and getting over 20% per year safely is not difficult with some easy-to-learn and easy-to-understand topics (which we will address in later articles, Inshallah).
Notice from the table how TIME impacts the returns you get. The earlier you start the better. Compare any 2 pairs of years (4&5, 9&10, 14&15, 19&20 years) for the same rate of return and see the difference it makes to your investment.
Some examples: If you invest in FDs (at 8% yearly return, Column D) then the additional amount you invest between the 4th & 5th year is Rs. 12,000 (1,000 per month x 12 months). The return you get is Rs. 14,000 higher (70,000 - 56,000) for that one year.
Now look at the big difference when it comes to the same FDs if you invested for 19 & 20 years. Here, the additional amount you invest between the 19th & 20th year is Rs. 12,000 (1,000 per month x 12 months) but the return you get is Rs. 57,000 higher (5.92 – 5.35 lacs).
In the 1st example you got Rs. 14,000 more and in the 2nd example, you got Rs. 57,000 more even though the extra amount invested is the same, i.e. Rs. 12,000 for the one additional year. Why? This is due of the effect of compounding and this is a very important part of how money grows if you invest regularly for the long term.
The effect of compounding is much bigger when you look at higher rates of return. Let’s look at the Column G, where the rate of return is 16% per year. The difference in the return you get between the 4th & 5th year is Rs. 25,000 (92,000 – 67,000) and the difference between the 19th & 20th year is Rs. 2.68 lacs! (17.49 – 14.81 lacs). Again, the effect of compounding!
Now stop here, take some time and see how this would impact you in your life. Starting to invest early is a very important aspect of creating wealth.
One more lesson. Look at Columns F & G, the difference in the rates of return is just 1% (15% and 16%) and look at the difference in the amount of money you get. For smaller time period of 5 years, a 1% rise in return gave you just Rs. 3,000 more and in you had invested for 20 years; the same 1% extra means Rs. 2.34 lacs more! Lesson: Yes, making a higher rate of return can make a big difference but again, TIME rewards you much more than the 1% extra return.
The lesson is clear: TIME is the most important asset if you want to make large amounts of money. Start early, as early as possible and Inshallah, you will have more than you need when the time comes. If you have newborn in the family, are planning for your retirement, want to save funds for a wedding a few years away … then I urge you, start now … and TIME will reward you abundantly. Having TIME on your side also makes it much easier and cheaper (since the money you have to invest is less) to have the money you need to live a richer life.
The truly visionary will look beyond their own generation, even beyond 100 years and invest for the 3rd generation. Think about this, if your parents or grand parents had invested for you, how much would have got by now? More importantly, will you now invest for your, your children’s and your grand children’s futures and allow TIME to ease your financial responsibilities?
I hope now you see the meaning of the phrase “Time Is Money”, it truly is.
Note: The article is not an invitation to invest in FDs or Mutual Funds or Shares. It is only meant to highlight the effect of different rates of return on wealth created. Readers are advised to make their own decisions about what, how, when and where to invest. The author is not responsible for any consequences.
(The writer can be contacted on ivfinance@gmail.com)
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