Albert Einstein once remarked, “Compound interest is the eighth wonder of the world.” (Image: PTI)
Just starting out in your career and wondering how to save and create a corpus of Rs 1 crore in a short span of time? All you need is a strict financial discipline and a bit of patience. As the great Albert Einstein once pointed out, “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Here’s how you can become a crorepati before you turn 40 and hang up your boots to tour the world!
Before we start out on the journey, it’s imperative to point out that creating such a massive corpus will certainly entail some risk appetite, and investors may need to take exposure to stocks or mutual funds. As it’s often said, “If you’re not going onto the branch, you’re never going to get the best fruit.”
Now once you’re ready up your risk appetite and invest into stocks/mutual funds, how much return should you expect? Ace investor Rakesh Jhunjhunwala says investors must at least look to make around 15% return. “I would expect 18% returns from the stock market. I’m quite sure that 15% is something that most investors should get over a period of time,” Rakesh Jhunjhunwala said at a recent event.
Last month, in an interview to CNBC TV18, Rakesh Jhunjhunwala had said, “In a growing economy like India with reasonably good corporate governance practices. I think India will grow at a nominal GDP of 12%. I see no way in which Indian equities will give anything below 15%.”
If you’re unsure of where to invest in the stock market, fret not! There have been a few funds from leading mutual fund houses which have consistently delivered 15% CAGR returns over a period of 10-years.
Once you’re clear that you’ll make 15% returns consistently, all you will need to do, is ensure to stick to the plan of investing consistently. Assuming that the average fresher starts out at the age of 22 years, and earns around Rs 18,000 salary per month, one would need to save Rs 6,000 in the first year of employment, a reasonable sum, given our humongous target.
You will need to save this amount for the entire year. We still have 17 years to go to reach our target with the help of compounding interest. Assuming that one gets an increment of at least 10% per year, you will have to up your investments at the same rate as well. Now, in the second year, the monthly investment rises to Rs 6,600. Further, the investor will have to increase the amount to Rs 7,260; Rs 7986; Rs 8,785 and so on. In the 18th year of his career, when the investor turns 40, the monthly investments would have to be Rs 30,327. Interestingly, assuming a consistent 15% return the investor would end up with more than Rs 1.05 crore, in just 18 years of time! This is when the investor’s 40th birthday would be round the corner.
If you’re not the kinds to take risk and invest in the stock market, and prefer risk-free investments, the corpus turns out to be Rs 56 lakh, assuming a rate of return of 7.6%, the current interest rate on Public Provident Fund.
In case the investors are looking to invest a constant sum over a period of time to create a corpus of Rs 1 crore, assuming 15% return, they will have to invest a fixed sum of Rs 9,169 per month. In case you’re willing to wait till your 42nd birthday to release this dream, you will have to invest just Rs 7,000 per month! As Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.”