Monday, February 7, 2011

Amazing story of three friends - Part 3





Three friends Mr. Cautious, Mr. Responsible, and Mr. Fun aged around 50 meet up after a long time in the Alumni Club. After the usual chats on the good old days, the discussion turned towards investing habits. 



Mr. Cautious was proud of his investment habit, he said "I have been been saving and investing since my age 30 and made good 12% returns".


Mr. Responsible said "I started my saving and investing once I established my family at my age 35 and made great returns of 15%". 




Mr. Fun said " I enjoyed my life thoroughly, went on foreign holidays and started my saving and investing only at the age of 40. But I made it up  by earning a fantabulous return of 18% ".



Now, let's for a moment assume, three of them put Rs. 1 Lac each. 
  • Mr Cautious put 1 lac at the age of 30 earning @ 12%.
  • Mr Responsible put 1 lac at the age of 35 earning @ 15%.
  • Mr Fun put 1 lac at the age of 40 earning @ 18%.

Now let's see who wins the race.....


At 50, during the time of their get together, can you imagine what kind of money each one of them would have made?

Mr. Cautious put Rs 1 lac at his age 30 and at his 50, he accumulated @ 12%

Rs.9,65,000


Mr. Responsible put Rs 1 lac at his age 35 and at his 50, he accumulated @ 15%


Rs.8,13,900



Mr. Fun put Rs 1 lac at his age 40 and at his 50, he accumulated @18%

Rs.5,23,450



Result: Mr. Cautious, @ 12% made Rs 1,51,100 more than Mr. Responsible, who got 15% ; And Mr. Cautious made a whopping Rs 4,41,550 more than Mr. Fun, who got the highest return of 18%. 


Moral of the story:

Saving should begin at the earliest even if the returns are moderate. Trying to catch up at the later stage may not yield desired results even if the returns are good.


As we saw in this case, the winner was Mr. Cautious who made higher returns than the other two despite deploying his money into lower returns than the other two.

The power of compounding is at work always and very very silently..... 

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