Apart from the other famous quotes in the 1958 movie “The Cat on a Hot Tin Roof” ,this particular line, which, Elizabeth Taylor’s character, Maggie tells Paul Newman’s character, Brick, “You can be young without money. But you can’t grow old without it,” sort of became a very defining moment for me when I watched the movie for the first time as a twenty year old.
At 20, when one is most commonly a student and has a habit of falling into financial crunches, I realised a fundamental truth of life that though it is kind of exciting to be without money as a youngster but it is very demeaning to be without money when you grow old. I always had a habit of saving a part of my monthly allowance in case I needed it for some emergency. That used to be my ONLY GOAL: Saving for an emergency. But then my priority changed and I opened another bank account only for my savings that were not to be touched and carefully segregated the emergency fund from it.
Corollary to Maggie’s words is the part that I had read in dozens of Personal finance articles in newspapers. They all urge you to start saving at an early age for your retirement.
So, it depends on your financial goals whether you have to start saving when you are in your 30s or have to start when you are in your 20s.
One article I came across mentioned that if you can save Rs 10,000($185.2) per month(which is a pretty low
amount), you’ll have over Rs 1crore (10 million rs or $185,200) when you retire.
At a glance, probably this is what comes into a person’s mind:
I = P*R*T or 120,000*.08*40= Rs 384,000 or $7,111. Pretty low, huh! So it’s not possible!
(Taking Rate of simple interest= 8% per annum, time period = 40 years, and Principal= 10,000*12= 120,000)
But here comes the power of Compounding, which, according to Einstein is the most powerful force in the Universe. The simple fact is that 120,000 is not the principal for 40 years. Each year’s interest @8 % (arbitrary value, not inflation adjusted) gets added to the preceding year’s principal and the new interest gets calculated on it.
Therefore, according to this calculation, if I start saving a small amount say Rs 10,000 per month when I turn 22, I can actually accumulate a sum of Rs 28.5 million or $ 528,000 when I am 62. This is solely a retirement fund and is separate from the emergency or the savings fund. This amount and the interest earned from it are perfectly sufficient to help you live comfortably through old age. This is the simple power of Compounding!
Some might argue that idle cash is itself a least productive resource (from the point of view of Economics, such a saving would only be a loss of opportunity gains) but from the liquidity point of view, and also in view of the fact that one might not decide to invest in real estate or stock, a disciplined saving is the best alternative.
Enjoy you weekend. More interesting posts coming up soon.
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©The Idea Bucket, 2013