To have any discussion on investing, the starting point is whether you aspire to have a better life in future. To achieve you need to believe in “Conserve today, Consume tomorrow”. This entire piece is on the importance of Net worth.Net worth building is a function of How much you earn?How much you save?How much return do you make on the saving? and for How long do you save?

Following are some scenarios of an individual who is 20 years old today:

Scenario 1)

No habit of saving since beginning till age 50:

Your Networth is Zero.

Scenario 2)

Your Net worth till you consume was 2L, but then became Zero and remains Zero till age 50.

Scenario 3)

Invest 10L after 20 years for a period of 10 years:

Your Net worth will be 26L at age 50.

Scenario 4)

Invest 1L once and generate 15% return every year:

100,000*1.15^30=65,00,000

Your Net worth will be 65L at age 50.

Scenario 5)

Invest 1L every year for 30 years and generate 15% return every year:

Your Net worth will be 5 Cr. at age 50.

Scenario 6)

Invest 1L in 1st year and then increase the amount of investment by 10% every year and expect 15% return every year:

Your Net worth will be 11.2 Cr. at age 50.

Scenario 7)

Invest 1L in 1st year and then increase the amount of investment by 10% every year and be slightly more aggressive in taking risks, so expect 20% return for first 10 years, then 15% for next 10 years and then 10% for next 10 years:

Your Net worth will be 22 Cr. at age 50.

There are many scenarios which can be made around this and one can tweak it by making excel spreadsheets, but life is not so easy and nor is it so linear, but you get the Gist of it. We’re just throwing different scenarios at you and their outcomes, one has to see what is best suitable for oneself.

The above scenarios give an idea of the importance of Saving. How much to save? How long to save? and How consistently to save?

Now just expanding more on the factors of Net worth building:

1)            Art of saving early: To start with let’s differentiate between “Want” and “Need”. “Need” is a necessity, you cannot compromise with it, you cannot postpone it. “Want” is a desire to have something which always exists at any given stage of life. Now, “Needs” are a function of responsibilities, more the responsibilities more the “Needs”, which usually come with age. Your starting point for this thought process is, before anything you purchase/consume, you have to ask yourself a question whether it is really a “Need” or not, if you are able to do this exercise then you will be able to make thoughtful decisions. While We’re not saying that stop consuming and be an extremely frugal person, but just trying to draw your attention on importance of Saving early. In your younger days when you have the luxury of postponing your “Wants”, capitalize it. We wouldn’t give examples of how to save since everyone is built differently and their patterns of consumption are different, but the broad thought process is of Saving. At age 50, you wouldn’t want to compromise with the quality of your Life. As you age, there are more responsibilities which comes at a cost.When you are younger you have lesser responsibilities which helps you in having the luxury of saving more. We agree in the current day and age it is difficult to not consume something, not get drawn to desires considering the fact that there are so many avenues of consumption, but we can just say it is possible if you truly believe in “The Art of Saving”.

2)            Expectations on Return on Investment (ROI): Once you have decided to save, then comes the question of the returns you expect from your investments. Basic thumb rule, lower the risks, lower the returns, higher the risks, higher the returns. Taking risks is again a function of responsibilities, lesser responsibilities mean higher risk taking appetite which means higher return on investments and vice versa. Once you have more responsibilities, you become more conservative and risk averse and make relatively lower returns on investments. We’re not advocating to take risk at the cost of loss of capital, but taking calculated risks. So, starting early gives you that advantage of being more aggressive on expectations of returns.

Again, Life is not something which can be predicted or planned, We’re fully aware of the fact that there are lot of things which hasn’t been captured in the above discussion, our intention is to point out the importance of Saving, amount of Saving, consistency of Saving, period of Saving and returns on those Savings.