The Cost of Delayed Investment

People tend to delay their investment each day to the following day with a mindset that it hardly makes any difference if the investment is delayed by 24 hours. But delayed investment could turn out to expensive. Find out how.

Consider a situation where money lying in savings bank account could fetch 10% excess returns over 4% that a person might be earning currently. But what if  you realize a couple of years down the line, that you don’t have enough funds to meet your goals (say buying a car/house, wedding, vacation) because you did not give enough time for your investments to grow!

So the answer here is pretty simple – “Start early, gain more”.

Sant Kabir said: काल करे सो आज कर, आज करै सो अब |

Not following the rule of the time can impact financial health of an individual. Let’s see how –

Example: Raj is 25 years old and he has decided to plan for his retirement at the age of 60 years. He has 35 years of time and he plans to invest monthly Rs 1000 in mutual funds. Assume return on investment is 10% (10% return is conservative and is taken based on average return, an equity-linked fund, generated over past 2 decades). Raj has three options to start with his investment as illustrated in the table below:

Scenario 1 Scenario 2 Scenario 3
Time Start now Start after 5 years Start after 10 years
Term 35 years 30 years 25 years
Monthly investment amount 1000 1000 1000
Amount on maturity 38,28,277 22,79,325 13,37,890
Cost of delay when compared to immediate start 15,48,952 24,90,387

 

The cost of delayed investment increases with increase in delay as seen from the illustration above. All these scenarios show that if Raj had started early, he would not have to earn eye-popping rates to accumulate handsome wealth. All that is needed is time. If investments are started early they have a longer time to grow.

Starting early is also related to compounding effect. Compounding occurs when the initial investment (called principle) is invested back to earn a further return. For example:  In the previous example assume Raj invested Rs 25000 in an instrument that yields 10% returns. Thus, return generated for the first year is Rs 2500. Raj decided to re-invest it with an initial amount. Thus, he invested Rs 27500 next year (Rs 25000+Rs 2500). In year 2, the returns generated increased to Rs 2750. This is the power of reinvesting or compounding whereby as time passes the initial investment along with returns of every year compounds itself to generate higher returns. It pays to start early!

Now, assume Raj decided to increase his monthly investment in all the three scenarios with an aim to ensure that his total investment remains same across all the three cases.

Scenario 1 Scenario 2 Scenario 3
Time Start now Start after 5 years Start after 10 years
Term 35 years 30 years 25 years
Monthly investment amount 2000 2333.334 2800
Total investment amount 840000 840000 840000
Amount on maturity 76,56,553 53,18,427 37,46,093

As seen above, it is very well evident that even if the total investment during the course of 35 years, 30 years and 25 years remains the same, the returns generated vary significantly with the first scenario outperforming the other two. This is because money invested at the beginning gets ample time to grow and multiply and the power of compounding which bears fruit when started early.

Points to ponder:

  • Start early – Starting to invest with the first salary is a very good idea irrespective of the amount invested. Small investment with ample time has the potential to translate to huge sum of money over time.
  • Investments are monthly bills – Like a milkman or a maid will not wait even for a day with regards to their salary, similarly, an investor should treat his/her investment as monthly bills and should invest without any delay every month. Using Systematic investment plan (SIP) makes life easier as the amount gets auto-debited from the bank account on a fixed date. Try the SIP Calculator to assess your monthly investment amount.
  • Have patiencePatience is a virtue is a well-known proverb. An investor should always follow this and should wait for long term to see the benefits of his early investing. One of the biggest mistakes people tend to do these days is that they withdraw their investments mid-way thinking that they have already earned decent returns. It is not a right approach as the pace of returns in initial years is slow and returns start to compound gradually over time. Thus, an investor should wait for their investment to automatically achieve its goal. Explore Goals to invest for.

There could be multiple reasons behind postponing investments such as people tend to think they do not have the magic figure to invest or they are concerned about market volatility, etc. In reality, there is no magic number to start with. Every number is a right number. Similarly, there is no good or bad timing. Now is always a good time to start investing.  You only need to act.

 

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