Why Financial Discipline in Early Years can Go A Long Way

Posted in Lending Articles By Rahul Kumar - Jul 11,2019
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When I started off my career, I obviously had no credit history and not much knowledge of financial products. Starting my first job with Citi, one of the biggest financial services company in the world, certainly helped in quickly coming up the learning curve but (alas!) only in terms of (lending) financial products.

Start Early

One thing that takes a back seat among many young professionals – embracing financial prudence in terms of starting to save early, eluded me too. As it happens with many, in the younger years, one tends to spend more than the monthly earnings and savings are usually negligible. There is also a tendency to spend lavishly on dining out, buying fancy new clothes, going on short outstation trips, spending lavishly on foreign tips and buying unnecessary household goods. The salary, for most, except folks from the Indian Ivy league like IITs and IIMs, is modest on an average. However, most of us in our younger years go through a cycle of spending splurge on items that were on the wish list since we were students. It’s almost like a very thirsty person wandering on a barren desert suddenly coming across an oasis only to find out later that the oasis had coke instead of water and was available on a drink-now-pay-later model!

By the time, most of us realise this folly and quench our artificial thirst, many years just go down the line, and we find our self just paying an unnecessary debt in terms of credit card liabilities and cash loans taken to clear high-interest card liabilities. In another few years, it is time to get married, which happens practically early on in India and then we take more debt to ‘settle’ properly with better housing, furnishing and a car.

Reaping the benefits of compounding

On the contrary, a very minuscule population, who for some reason have financial wisdom engraved in their DNA, start saving very early on, especially in equity through SIPs; these folks become retirement ready by the age of 45 as against 90% of us who will slog it out like the regular salaried population for many more years to come. You see, they take advantage of the enormous power of compounding.

For example: Let’s consider today’s Sensex closing growth % as against June 2009 (approx. 10 years). The Sensex in the same period has grown by ~172%. Around Rs 24,000 per year or Rs 2,40,000 invested over 10 years would have become approximately Rs 11.74 lakhs on a compounding basis (17% YoY growth) by 2019. That’s approximately 5X growth. That’s the power of compounding! If one keeps investing a regular amount every year and reinvesting the interest earned, your investments grow multiple times in 10-15 years’ time horizon.

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Start now, so that you’ll be off to long vacations in your semi-retired state in your late forties while some of your old colleagues would be still burning the midnight oil. Hope you want to be the former and not the latter!

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