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Did anyone tell you that it is not how much money you EARN NOW that will determine your future prosperity but it is how much you SAVE that will decide your future prosperity. Sounds funny-no? after all your saving rate will depend on your earnings and so on so forth. Not really-your saving rate will depend upon your desire to save and nothing else. And not only that, the sooner and more regular this desire is the more you will benefit in the long run. How many times we leave a portion of our income in our savings account which earns a negative rate of return taking into account inflation? And then the siren of liquidity beckons us and we go ahead and spend that money, only to find that we have cleaned out the account. Needs and wants will always be there. But in order to get the perspective right it is best to put the savings on auto pilot, where a certain amount is monthly put away automatically, either into PPP, or Post office deposits, or recurring bank deposits. A large target of RS 60,000 p.a. seems impossible unless you break it up into months and put away RS 5000 per month. Now that doesn’t seem too much does it?

Also remember the saying "First you earn money, Then you save that money and Finally, that Money Earns for you". Take an example of two of your friends, both aged 26 years - Mehul and Rohit. Let us assume that both get jobs at the same time paying identical monthly salary of say Rs. 10,000. Mehul from the age of 30 years starts saving Rs.l000 per month and keeps investing into a scheme which yields him interest of 12% per annum. Rohit decides to have a great time by blowing up his entire salary till he is 40 years and starts saving Rs.l,000 p.m. and invests in the similar scheme, also yielding 12% per annum returns. That head start will make all the difference to Mehul when he reaches the age of 60 years.At the age of 60 Mehul will have Rs.35,30,000 with him from his savings scheme while Rohit will have only Rs.10,00,000 from the scheme !A ten year head start can make such a difference basically because of the Power of Compound Interest -To put it simply, "Interest on Interest is always Interesting". When you start earning interest on Interest, it is known as compound interest. So if you deposit Rs. 1,00,000 @ 12%, for 3 years cumulative deposit, you earn Rs. 12,000 for the first year, Rs.13,400 for the second year and Rs.15,053 for the third year and so on. Also notice that the longer the period, compounding starts galloping and that is the benefit your Mehul will get by starting saving early at 30 years over Rohit who started only at 40 years. Further Mehul with his Rs.35 lacs at 12% interest will earn Rs.35,000 per month extra income on his savings at the age of 60 years compared to Rohit's monthly income of Rs. 10,000 on his Rs. 10 lacs savings at the age of 60 years.This is why the PPF with its current 11% tax free return is a major power investment. Even if you go in for mutual funds it is better to go in for the growth rather than the dividend option-both in terms of taxation as well as compounding. The systematic investment plans offered by mutual funds is another good habit to have. They help to even out the market fluctuations, plus help you build a substantial portfolio over time. In case of fixed return investments like bonds etc. also this argument of opting for the growth option holds.

Saving should be made into a habit from the start itself. Remember save as you go-save every moment. Make savings a goal whether it is the child’s education or her marriage or retirement. Use more cash less plastic, credit cards make you loose track of how much you have spent. One ATM visit a fortnight should be your goal, carry less cash with yourself as then you will spend less. Don’t give up your pleasures in life-just ration them. In case you are taking a loan-reduce your high interest payments and make a higher down payment . Save your raise-earmark it as your savings for this year. With these little measures of control you will be able make regular savings a habit.

The power of compounding also helps somewhat to negate the evils of inflation. With the interest earning interest on it, the yield -i.e.-the overall return to the investor increase and this can help to combat the inflationary pressures which eat away the real return on an investment.Also remember that at every stage of your life the saving pattern and your risk taking ability will be different. So plan your investments accordingly. But make saving a habit-regular and unforgettable. Compounding is a potent weapon. Ignore it at your own peril.

Aru Srivastava

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