Hey,
Today, I am going to tell you about a connection that you might have guessed from the heading, yes the connection between time and money. Now, you would say hey man we know this, that if you keep saving or investing the money will grow. You are absolutely right here money will grow but there is one more factor that affects it and I will discuss it later in this article.
So, let’s start with it.
Net Worth
Net worth is one of the most important financial words yet a very few go to calculate their net worth.
So what is net worth?
It is the difference between the sum of all your assets and the sum of all your liabilities.
Calculating the net worth is very easy and if your net worth is positive, congratulations you are better than 60% of Americans. Yes, you heard right about 1 out of 5 Americans having zero or negative net worth.
So, how much do you need to be in the 1% club?
Well, to be in 1%, it varies from country to country but its basis is always done with respect to USD.
So, in India, you need to make $77,000 per annum to be in 1%, which is roughly 59 lakh per annum.
By comparing PPP between India and USA, the top Indian 1% requires 17 lakh per annum.
Doesn’t sound impossible now, no.
So, if you want to increase your net worth thus improving the share of your assets.
I have come up with very cool tricks.
And also the best part is that you are in early-stage if you are reading this now, thus giving a lot of time to see the power of compounding.
Now let’s see the power of compounding.
Compounding
Compounding works by growing the money exponentially. One cannot expect returns in a couple of years. It just works like any other skill like the more time you spend on practicing a thing, the more proficient you will be at it.
You can just see how the exponential power of 2 works.
25 is 32 whereas if we double it 210 is equal to 1024 and that’s how compounding works. The starting gains will be the same but with time the growth will be exponential.
People tend to quit after coming halfway not realizing the exponential growth shoots up at once.
So, now the question comes, how to compound the money you earned.
The answer is simple, either by investing it in stocks or mutual funds.
Now you would say, why choose the risky way, I would invest my money in FDs for the next 30 years and it will still compound, even if the returns of FDs are less than equities.
Here, the direction is right but some facts are missing, will take about this again. But, first, let’s look at the returns
- an FD would yield ~4% p.a (after-tax),
- an index fund would yield ~12% p.a (lower tax rate) and
- a proper investing strategy would yield ~returns will be equal to your strategy
Now, if you would calculate it properly, assuming an investment horizon of 30 years, an investment of 1 lakh Rupees in
Fixed deposit returns
INR 3.2 lakhs
Index fund returns
INR 30 lakhs
By just investing only in index funds, your returns become 10x of FD returns
And if with a proper investing strategy you could generate returns of 26% p.a.,
you can get returns of INR 13 crores
And by following a disciplined approach, you increased your returns by 400x of FD returns
Now, coming back to the point of investing in FDs there is one more catch, that most people forget about i.e. Inflation
INFLATION
Inflation is the increase in the price of goods or services of daily need or anything else.
Inflation is the poison that eats the money which is sitting idle in a bank account. Let’s say inflation is at 7% p.a.
And here in this case if you invested your money in FDs which give returns of 4% p.a., you are losing the money. The amount of money is definitely increasing, but the value of money is decreasing slowly.
INR 100 in the ’80s is worth the following in the given years,
1980 – INR 100
1990 – INR 236
2000 – INR 558
2010 – INR 1,026
2022 – INR 2,115
In 40 years, the purchasing power has reduced 20 times.
That’s why it’s important not to invest 100% in Fixed deposits since the post-tax returns are always below inflation.