How much should you be investing?

When it comes to saving and investing,people are obsessed with the returns they're going to get.

When it comes to saving and investing,people are obsessed with the returns they’re going to get on their money!

This may sound great,but there are two other factors! These two factors that determine how much money we end up with are – the amount we put into our savings and investments in the first place and the amount of time we have it there. These two factors will have an impact on how much money you end up with than mundane things like investment returns. For instance,let’s suppose that you need to cobble together Rs 10 crores over 40 years and you reckon on getting an investment return of 12 per cent per year. If you pop the numbers in to excel,you’ll see that you have to save a paltry looking Rs 7,960 per month.

Now imagine that you spend an extra ten years of your life on the spending mode and you find yourself with just 30 years to get your Rs 10 crores together. At the same 12 per cent per year investment return,you’ll now have to save a difficult Rs 28,000 per month. More than three times the monthly amount,although we’ve only taken a twenty five percent off our time period.

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What if we did fancy ourselves to get that higher investment return,which would surely get us to our Rs 10 crores over 20 years? Well at Rs 88,000 this is not really easy now. Well what about getting to Rs 10 crores in 20 years with a smaller amount and a higher rate of return?

Calculate regularly

It’s important to know that these calculations only tell you what to do,given certain assumptions. Those assumptions are guesses at best and they’ll change regularly. The investment return you get might be different from predicted and the date of your retirement might get closer or further away. Most importantly,since we’re saving money in today’s money,we’ll have to keep increasing the amount we save to take account of inflation and average earnings growth.

Let’s go back to the original example where we were expecting a return of 12 per cent per annum and aiming to cobble together Rs 10 crores over 40 years. To do that we set about saving Rs 7,960 pm. Now let’s fast-forward to 2016 (five years from the start) and look at two possible scenarios – one good and one not so good.

Scenario 1

Things go fine!

In the first scenario,we’ve actually managed an excellent investment return of 22 per cent per year. That gives us a pot of investments Rs 9,00,000 worth.

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Plugging the numbers in,we find we need to save Rs 7,000 per month to get us there! That’s a paltry fall of Rs 960 per month!

Scenario 2

Things go,not so well

In the second scenario,we’ve actually managed an investment return of 10 per cent per year. That gives us a pot of investments worth Rs 6,50,000 Again,inflation and earnings growth have amounted to 6 per cent. Plugging in the numbers for this scenario,we find that we need to put by Rs 9,600,again just a little more than what we have been investing so far.

Either way,it’s better than doing nothing

What you can see from both the above scenarios is the importance of getting started early. Where things had worked well for the first five years,you’d be left looking to invest Rs 7,000 per month. Where things had gone badly,you’d be left saving Rs 9,600. If you hadn’t started saving at all,though,you’d be left needing to save an unlikely looking Rs 15,300 per month. So get investing now!

Author is a blogger at http://www.subramoney.com