#3 Personal Finance – Lesson 1 -Why should you save money?

Why should you save money? Lord. Compounding!  explained.👍

Lesson 01 is about why you  should save money? Now I know what you guys might be thinking , dude!😕you just sound like my dad now !! but wait ! you know what? there is some logic when they say it and I ll try to explain the logic why they say it.

    Lets take the case of two friends Sasuke and Itachi ( Characters from Anime Naruto Shippuden 😍. Both Itachi and Sasuke completed their graduation( Ninja Academy-Leaf Village)  and they both individually at the age of 23 started to earn a salary of Rs 30000/month.

                             

Sasuke decided that he has enough time to save and he did not want to save right now as this was first time he was making some real money, so he decides to chill out whereas Itachi feels like he need to invests and starts investing on his upskilling that could help in advancement of his career(shinobi ninja career)  in different ways.

    So now, in the 1^st year of work both Sasuke and Itachi decides to chill out and not to save any money and enjoy every penny they earn from thier ninja battles. But after the 1^st year Itachi becomes little prudent( awakens his mangyakun sharingan) . Lets assume Itachi saves Rs 5000 every month from his salary but Sasuke on the other end decides not save any money but to chill and relax.

    Itachi saves this Rs 5000 month on month for 10 years , that is

Itachi – Age 24 to 34( 10 years) Invests Rs 5000 per month So for 1 year ie 5000*12= Rs 60000/- Rs60,000* 10 years = Rs 6 Lakhs invested

    Remember as they both get older, the salaries get even more , so investing that Rs 5000 month on month also becomes easier.

    Now Itachi after investing after 10 years  accumulated  Rs 6 Lakhs in his  mutual funds  account which gave 15% interest on his investment and woah!  the total amount Itachi made from his investment is Rs 13.76 Lakhs. But Sasuke now feels dumb as ever when he accidently looked at his bank's account (what's gone  wrong brother !)

    So, Itachi continues to invest the same Rs 5000 per month till he becomes 60 ( which is now the cost of his party lunch) and blimey guess what ! he would have amassed Rs 6.32 Crores .Olaaa! Yes ! 6.32 CRORES is done with just at Rs 5000/- month on month).  You guessed right ! Sasuke is long begging. )

And on an important note , this is the one simple reason why I need you guys to save and invest money and the effect of Rs 5000 becoming 6 crores is  possible due to one simple word and that word is known as Compounding."( Lord Compounding)"!💥

Now what is compounding , now in order to explain it, let me just take a simple example. For instance, just take a ball on that top of the mountain and you roll it down from the top of the mountain full of snow. As the ball is rolling , it gathers more snow down hill and when finally when the ball rolls down the mountain it becomes a massive ball of snow. This massive ball of snow finally formed is known to be the effect of compounding!

Compounding is basically when you stay invested  for a long term , that investment earns interest on interest at every interval and basically grows further and further   to an extent  where it becomes a huge amount compared to your initial investments.

In order to explain in a simple way;

Lets say in ths 1^st year  you invest Rs 10000 for a year at 5% in bank and as interest from the bank you earn Rs 500/- and so the total amount at the end of year 01 is Rs 10,500/- as highlighted in the table below and this Rs 10,500 becomes the 2nd months principal amount. In the 02^nd year , you get 5% interest on Rs 10,500/- ( and not on Rs 10,000/-). So the interest earned  for Rs 10,500 for 5% interest is Rs 525/- which makes the total amount in the kitty to Rs 11,025 /- ( ie Rs10,500+Rs 525=Rs 11,025)

Year	Per Annum	Rate	Interest earned	Total`
1	Rs 10,000	5%	Rs 500	Rs 10,500
2	Rs10,500	5%	Rs 525	Rs 11,025
3	Rs 11,025	5%	Rs 551	Rs 11,576
4	Rs 11576	5%	Rs 579	Rs12,155
5	Rs12155	5%	Rs 608	Rs 12,762
6	Rs12762	5%	Rs 638	Rs 13,400
7	Rs13400	5%	Rs 670	Rs 14,071
8	Rs14071	5%	Rs 703	Rs 14,774
9	Rs14774	5%	Rs 738	Rs 15,513
10	Rs 15513	5%	Rs 775	Rs16,228

So the above table represents compounding of money at work.

You can go and play around with some inputs through some  online calculators just by searching SIP calculators and Lumpsum Calculator in google and check for yourself the  power of compounding effect  To get more kick just fiddle with the interest and the tenure in those calculators.( Provided a snapshot of such online calculator).

You also have to remember , compounding depends on two core things . One of which is “TIME” ( Holiness Time)🙏. The earlier you start ,  more you have the time to compound and the later you start you will have lesser time to compound. ( Compounding is magic in reality) and the second one is the systematic periodic contribution of money as investments.

Compounding is like a one day cricket match ( 50 overs) , wherein the first 30 to 40 overs you anchor the innings and in the last 10 to 20 overs the batting team goes berserk starts hitting out of the park. Same thing happens with compounding. In the first few years, you will see your money growing like snail, but in the last few years, the money grows in an rapid exponential rate beyond one’s imagination.( breaching escape velocity)!

Lord Compounding also punishes the one’s who have not started early , the cost of not starting early is immense…look for yourself at the pic below

 

 Although Karishma invested more than double the investment of Kareena and also doubled the investment period than Kareena but still she could not beat Kareena’s total amount accumulated. Karishma is effectively punished on all fronts by compounding just on the cost of  starting her investment journey late.

CONCLUSION: To create wealth and to achieve financial freedom, one must primarily understand that  it is not about the quantum of money invested  but it is about TIME. How long you can compound with your continuous little money matters than anything else.

In the field of  Investments, it is said there is a famous quote -

( We can talk more about this statement on an another upcoming blog)

So ,dear friends ,just start now!, Befriend Lord Compounding - Start small, embrace time as your confident aid in the pursuit of your deserved financial freedom.

 Ahh ! By now you must have appreciated why saving money is important. In the next blog we will see exactly why should you invest the money that you save.

Hope you enjoyed reading this one. Thank You, keep safe & Be Empowered... 😊

This blog “Empower Finclass "is an effort to educate and spread the word of financial knowledge and awareness whilst empowering the community with a touch of practicality on personal finance.

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