This is going to sound contradictory to everything we have discussed so far. Isn’t the point of investing to to let the power of compounding make you rich?
Even when you use a modest 10% annual return, a compound interest calculator will excite you with enormous numbers that will make you feel rich. If you are feeling really lucky and use 15 or 17 as your annual return, you might have to ask your friend to pinch your wrist to see if you are lost in a day dream.
Let’s be real, most of us are not going to get 15% or more over the next 30 years. Even if our equity investments do very well, our debt component will bring down the average down to 10 or 12 percent. Pre-tax!
If tax wasn’t bad enough, wait till you deduct inflation from all of this. If you are reading this, your personal inflation is more likely to be in the 10 to 12 percentage and not the national average of 6 or 7 percentage.
What we are left with, in the best of situations, is a 2 or 3 percent growth. If we are lucky. Now run the compound interest calculator with annual growth as 3% and see how you fare. Imagine having that money today and that’s pretty much how rich you will feel when you have the money in the future.
A little oversimplified, but the point is, if you are not rich today, investing alone is not going to make you much richer.
You are probably in denial and I appreciate that. I was too when I first realized this.
Imagine everything that you think you want to buy when you are rich. The villa, the supercar, the expensive vacations, the truly aspirational things. Every potential candidate for that life is already investing just like you. If everyone is equally rich, is anyone really rich after all?
Ten years back, a two BHK flat meant somewhere around 50L or 60L in many areas of India, including some parts of Bangalore. These days you need 1Cr or more for an equivalent flat. If your money is growing at the effective 3% rate and if every potential buyer can afford these flats, builders are going to price it so that it always remains just outside your reach.
Not so long ago, a good SUV was priced around 15L. These days you need just about that much to buy a top end hatchback. Proper SUV’s are nearing 25 or 30L.
What is the point of investing if it’s not going to make us rich? The true purpose of investing is to meet your goals. Investing hopefully beats inflation and gives you a nice bonus for the risk you take. Investing alone is not going to rewrite your story.
Let’s take an example. If your monthly expenses are 50k today and if you invest another 50k every month, you will have an extra month’s worth of expenses at any point in the future adjusting for inflation. This assumes that your lifestyle doesn’t inflate over time.
So if you save a month’s worth of expenses for 30 years, you can comfortably live for another 30 more years without making more money.
Which means if you want to retire early, you have to save 2X or 3X your monthly expenses every month. If you save 3X for 20 years, you can live for another 60 years. So if you earn well and save well at the age 20, you could retire at 40 and live till a 100 without worrying about money. Investing well can make you financially free.
The only way to be rich is to earn disproportionate income. This could come from a business or a very high paying job. You have to be rich today to be able to afford the rich life in the future.
I am a WordPress product developer and creator of Image Attributes Pro. I am passionate about solving problems and travelling the world.
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