This week I came across an article from Mr. Nilesh Shah, President, Axis Bank. It's worth reading & implementing. The first mantra of attaining financial independence is to start early. Like the story of an ant and a grasshopper, start saving for the rainy day as early as possible. The power of compounding makes a huge difference on early savings. Each day's delay causes loss of compounding and, hence one should start as soon as one can.
Let's make this example clearer with the help of the 1969 film ' Sachaai ', starring Shammi Kapoor and Sanjiv Kumar. Ashok and Kishore are two friends who have studied together for long and graduate at the same time. Both of them land good jobs with different cities, at a starting salary of Rs. 50,000 per month. Ashok is happy-go-lucky person and believes in enjoying his life. The monthly salary he receives is spent on cultivating a good life style. Ashok spends on branded clothes, eating out, travel and expensive gizmos. Kishore, on the other hand, is a conservative person. Having come up the hard way in life, he is a reluctant spender. He believes in not spending beyond his means. Kishore saves Rs. 15,000 every month. Obviously, he sacrifices a lot of pleasures in life. He rides a bus while Ashok prefers a personal cab. He eats at Udipi hotel while Ashok indulges in fine dining. He buys at clearance sales while Ashok goes for branded stuff.
This continues for 10 years. Ashok and Kishore meet at the college reunion. Ashok is nicely dressed and is the center of attention as he talks about the good things in life. Kishore is ignored by most as the subject of his talk is dry and boring.
However, Ashok and Kishore discuss with each other everything about lifestyle and saving. Ashok has no cash balance. Kishore talks about saving RS. 15,000 a month. Kishore talks about his simple life and Ashok talks about his colorful life style. Both of them realize they have been missing each others style in their life.
After that night, Ashok becomes a saver and saves Rs. 15,000 a month for the next 25 years. Kishore becomes carefree and does not save anything but doesn't touch his accumulated saving. After a period of 25 years, Ashok and Kishore again meet at the college reunion. By then, Ashok has saved Rs. 15,000 every month for 25 years ( albeit 10 years after Kishore started saving), resulting in a principal saving of Rs. 45,00,000. Kishore has saved Rs. 15,000 per month for just 10 years ( albeit ahead of Ashok), resulting in a principal saving of Rs. 18,00,000. Ashok has saved 2.5 times more in amount and time than Kishore. However, to the utter surprise of Ashok and Kishore, Ashok's bank balance is Rs. 2.84 crore where as Kishore's is Rs. 6.90 crore ( assuming 12 per cent monthly compounding with no tax payable). Ashok has saved 2.5 times more in terms of time as well as amount, but Kishore's bank balance is more than 2.42 times Ashok's. This surprise is known as compounding. As Albert Einstein mentioned, is does not stop and is the eight wonder of the world. The earlier you save like Kishore, the better your prospects.
Compounding is the best friend of an investor. Use it to your advantage to the hilt. Don't wait for an opportune time to save money. Start saving from whatever you have, whenever you have. Early saving is like planting seeds in fertile land. Give it some time and soon it will start growing from a small seed to a small plant to eventually a big tree. The ' Sachaai ' of financial independence starts with early saving. Hope after reading this article, your will walk instead of taking a cab and put that saving to work for compounding.
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