Penny’s Worth

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A penny, or, in our country, a rupee, seldom attracts our attention. We dream of millions and billions of rupees. Hence, neglected, the poor penny is ignored and squandered nonchalantly.

But the real power of a penny is understood by only a blessed few. They are the alchemists who know how to turn a penny into hundreds and thousands and even millions!

Don’t lose your heart, yet. The elixir of these wealthy alchemists can be accessed by anyone, provided you look in the right direction.

“Compound interest is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it.”

  Albert Einstein

Yes, it is the compound interest that helps turn a penny turn into millions, over a period of time.

But how does compounding work?

Well, in a basic interest system, when you invest your money, say in a bank’s savings account, you earn interest on the principal amount invested by you. At the end of the term of the deposit, you get your principal as well as interest earned on that principal during the tenure of the deposit.

Now, in a compounding interest system, during the tenure, you not just earn interest on the principal sum, but also additional interest on the interest earned during the tenure.

For instance, INR 20,000 invested in a scheme paying simple interest at an annual rate of 10% for 5 years will fetch you:

20,000 + (20,000 X 10% X5) = INR 30,000

However, the same amount invested for the same period at the same rate (paid annually) in a scheme paying compound interest will fetch you:

Year 1: 20,000 + (20,000 X 10%) = INR 22,000

Year 2: 22,000 + (22,000 X 10%) = INR 24,200

Year 3: 24,200 + (24,200 X 10%) = INR 26,620

Year 4: 26,620 + (26,620 X 10%) = INR 29,282

Year 5: 29,282 + (29,282 X 10%) = INR 32,210.2

In ten years, the investment in a simple interest yielding scheme will fetch you INR 40,000, while a compound interest scheme will grow your money to INR 51,874.85. The divide between the returns from both the schemes grows phenomenally after twenty years when the simple interest yielding scheme gives you a measly INR 60,000, while the scheme offering compound interest will grow your portfolio to INR 134,550!

In the present day, mutual fund investments, especially through SIPs (Systematic Investment Plan), offer everyone an opportunity to mint additional money and create massive wealth over a long period of time, say ten years or more. This is possible because of the inherent element of compounding present in the way mutual funds work.

In the illustration above, we have assumed yearly compounding of interest and the rate of interest to be 10%. However, over a horizon of 10 – 15 years, mutual funds have given returns to the tune of 15% and more. Also, the magic of compounding works even better with SIPs because the effects of compounding work on a monthly basis. This means that regular mutual fund investments, over a long period, actually turn pennies into thousands, and eventually, to millions.

Now, you too can become a millionaire. All you need is small yet regular monthly investments, under the guidance of a financial expert.

If you are young, in school or college, this is the best time to start investing in mutual funds through SIPs and reach your first million mark before you turn thirty.

 

 

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Are you banking on education alone to secure your future?

This might sound an absurd question to a school-goer, but believe it or not, it is the most pertinent question a true well-wisher would ask.

Traditionally, as a society, we are raised in an environment where education is of utmost importance, and though the times are changing, most parents and teachers believe good education as the only means to ensure financial security for the children.

Of course, a good education is nothing short of a boon for a child. In fact, it is our society’s persistence and passion for education that is helping Indians shine in every sphere of life.

However, most often than not, we mistake education for an investment scheme. Parents spend a fortune on providing quality higher studies for their wards, with a hope that after gaining a degree, their offspring will certainly secure a well-paying job and live a comfortable life.

Unfortunately, the ROI-based approach towards education has not only resulted in mass production of engineers, doctors and MBAs – leading to mushrooming of thousands of ‘me-too’ institutes of higher studies – but has also sacrificed many young dreams and aspirations on the altar.

Why shouldn’t you bank your future on a good education alone?

The law of demand and supply applies to job markets, too. As parents from far corners of the country pump up all their savings and investments to provide higher studies to their children, they are simply adding to a huge funnel of educated, unemployed youngsters vying for the already dwindling global job markets. In short, in education, your investment is not fool-proof.

What else should be done to ensure a financially secure future for our children?

While education aligned to a child’s interest and talents is a must, parents must also focus on making their children financially literate.

Remember, even a highly educated person with a plush job, and a huge salary can find himself in financial doldrums. It is important the children must learn how to treat money.

With marketers luring unsuspecting buyers at every corner with seemingly incredible discounts, many of us are falling prey to senseless buying – often ending up in chronic debts.

A financially literate person is disciplined with his or her spending and doesn’t fall for such snares. Also, they know the power of small investments, made regularly.

Children, especially the teenagers, have the luxury of time. With little financial discipline, basic awareness of financial tools and small investments (as low as Rs 500 per month), school children can create massive wealth until the time they are ready to take up their first job!

With a sense of financial security at a young age, our children would not be burdening their dreams or desired lifestyle with the anxiety over the next paycheque.

Learn more on instilling financial discipline and imparting financial literacy to teenage children at the Super Young Achievers Conclave, the first of its kind event organized for school children above 14 years of age where the participants can take concrete steps towards making their future financially secure. The conclave will be held on 12th Nov 2017 between 9:30 am to 1:30 pm at Ravindra Bhavan, Margao, Goa. Watch out this space for updates about the event.