This is a story i narrated to one of my friends, who just refused to believe the importance of compounding in investments and was considering himself quite happy to be investing in a traditional way.

The story goes in this way : If Ramesh had invested only Rs. 4000.00 per month when his child, Suresh, was born and done the same for next 18 years. Thus Ramesh would have in total invested Rs. 8.64 lacs over a period of 18 years & we assume his growth on SIP investment at a very a conservative rate of return, would be of 12% p.a.(Avg. Returns of good funds are in the range of 18% p.a. for 15 years history).

As Suresh had just cleared his HSC at the age of 19 years and wanted to do chemical engineering, he would need to pay a capitation fee of Rs. 5 lacs and 1 lacs for hostel expenses. Ramesh without any hasitation, withdraws from his investments and gives the same to smiling Suresh.

Ramesh also promises to Suresh that from next year i.e. from his age of 20-29 for next ten years he would pay him a pocket money of Rs. 1 lac p.a. to take of some of his expenses, so that he concentrates on his studies and career stability, without any worry !!

At the age of 30, since he is quite stable in his job, Suresh is getting married. Ramesh gifts him Rs. 5 lacs, with which he can enjoy the honeymoon or use the same home-building. Suresh is ecstatic !!
As Suresh is married now, his personal expenses increase, so Ramesh gives him 1.5 lacs a year for next 2 years. Suresh can’t hide the pleasure!

Next year Suresh becomes a proud father, Ramesh whole heartedly gifts his grandson 2.5 lacs. The family looks a happy unit !!

Next year, at the age of 34, Suresh has desire to buy a Car.....Ramesh says “don’t worry friend, take this 5 lacs and go and buy without any loans.....” Suresh’s dream come true !!

For Next 2 years, Ramesh keeps giving Suresh 2.4 lacs a year !!

At the age of 37, Suresh again becomes a proud father of second child, WOW Ramesh gifts his second grand child also Rs. 2.5 lacs !!

Since Suresh has 2 children now, Ramesh decides to pay Suresh 3 lacs p.a. for next 13 years....i.e. from 38-50 years of his age.

Finally Ramesh getting too old, checks his withdrawals and balances, and he finds that he had invested 8.64 lacs over a period of 18 years and he already withdrawn Rs. 77.80 lacs.....and to his utter surprise he still a corpus of Rs. 90 lacs balance, which he gift Suresh for his retirement planning !!

I really did not need to tell you what happened next, my friend has already started investing, when is your turn?

Author's Bio: 

Rajendra Bhatia – Founder and CEO, Arthashastra Financial Planners (www.aarthashastra.com)

A Certified Financial Planner (CFP), Investment Advisor and CEO of Arthashastra Financial Planners, located at Mumbai. Founded this boutique personal finance advisory firm in 2004, having more then 15 years of industry experience and a passion to create personalized, efficient and effective solutions in the space of personal finance having strong belief in core values of Integrity, Wisdom, prudence & Team Building. Loves travelling, reading and walking.