There is No Fate But What We Make: November 2005

Friday, November 04, 2005

One crore !

One crore rupees ! Most Indians just choke thinking how much money this is. No wonder those crorepati quiz shows are so popular. Unless you inherit that sum or win a quiz show, there’s no way you can ever create that much sum – right or wrong ?
Wrong … Wrong… Wrong… each person can create that much wealth… I personally know someone who has reached the halfway mark in 5 years. He hopes to reach the one crore mark by 40. No, he is not an Amway agent or made a killing in an IPO. His technique:

- Create a clear goal and calculate the amount needed to be invested every month.
- Live below the means (so that investments can be made to meet the big future goals)
- Invest every month. Ignore the SENSEX and mainstream media.
- Maintain Asset allocation
- Minimize taxes and investment expenses

Say, you are 22 years old and just starting your career. Invest 10,000/- every month into a diversified equity fund (or your chosen bunch of stocks). Reinvest all dividends. Taking a 14% return, in 18 years when you are 40, you have 1 crore ! Go retire and tour the world! That’s the power of compound interest.

Most of us know about compound interest. But we don’t realize just how powerful it is. Back in the 16th century, a bunch of Native Americans sold the entire Manhattan land to Dutch traders for a paltry sum of 24 dollars. Most people mock the Native Americans for being so stupid. But their real stupidity is not the selling. But it is the fact that they did not invest those 24 dollars. Had they invested the amount in something that gives even a measly 8% returns, over the next 400+ years, the amount would have become multi-trillions. Enough, for their progeny to buy back the land of Manhattan, plus those of entire New York state, plus the three neighbouring states.

That’s the power of compound interest. Go figure.