Is It Really Worth Investing Small Amounts Per Month?
“Do not save what is left after spending, but spend what is left after saving.” - Warren Buffet.
As rightly said by Warren Buffet, to become successful in professional life one needs to put in efforts consistently. Every small effort counts and every milestone achieved in the process brings you one step closer to success. There might be small failures on the way, but one must learn to stand up after these failures to rise again and not give up. The same thing applies to your finances. When trying to fulfill financial needs, there might be certain important milestones and small failures, but one must learn to stay invested in the market in the long term in order to build wealth.
We have always been wise savers, that much is certain. However, today’s world is changing at a very fast pace from time to time and with that there is an increasing need for us to transform and change our old saving practices. During such times there is the need for a paradigm shift from being savers to moving on to being investors. Saving plays a critical role in our transition from competent savers to astute investors.
Saving is a necessary step when it comes to creating wealth and a future that is financially stable and stress-free. However, the very next step would be to invest the saved money. Various motivators have pushed Gen-X and Millennials to become more aware and cautious about their savings and investments. Through prudent investment, Indian millennials want to achieve early retirement and financial independence. However, too much information is being disseminated, causing more confusion than clarity.
We live in an emerging economy and during such a time most millennials in their early working years are perplexed by the question of "What amount is enough to start saving or investing." There are really two ways to respond to this query.
The Analytical Lens
To look at it we need to first understand these terms. Savings, by definition, means setting aside a sum of money from your hard earned money which can be used to fulfill financial dreams, needs and can be utilized in times of peril. However, financial needs can be never ending. For someone who lives in a studio apartment, might have the desire to own a 3bhk home. For someone who owns a 3bhk home, the desire could be to own a luxurious bungalow. Thus, it can be established that there is no such thing as enough money for savings.
Saving in small amounts such as Rs 1,500 from your hard earned money each month might help. However, do you think it will be able to beat inflation? To achieve financial dreams, just savings aren’t enough.
Let's assume the following investment scenarios :
- You are 22, and you invest Rs 1,500 per month in SIP, growing it yearly by 10%. You stay invested till you are 50.
- You are 40, and you invest Rs 12,000 per month in SIP, growing it yearly by 10%. You stay invested till you are 50.
| Total Investment | Corpus | Wealth | |
| Scenario 1 | 24,15,779 | 1,62,51,612 | 5.73x |
| Scenario 2 | 22,94,989 | 47,48,903 | 1.07x |
*Assuming 15% CAGR
In the above scenarios we can clearly see the benefits of starting early, indicating the power of compounding. In the first case, we can observe that a modest monthly investment of Rs. 1500, compounded yearly at 10%, resulted in a total investment of Rs 24 Lakhs, creating wealth that is 5.73 times the entire investment, establishing the corpus of Rs 1.62 crores. This was the case since the investment tenure was 28 years, ranging from the age of 22 to 50!
In contrast, in the second scenario, a much larger investment of Rs 12,000 per month, grown by 10% yearly generates wealth that is only 1.07 times of the total investment. In figures, this looks like a huge amount since Rs 23 Lakhs have generated wealth of Rs 47.5 Lakhs, however comparing it with the first scenario, the benefit is negligible.
To conclude, starting early is the key to wealth creation. Maximum advantage of power of compounding can be taken when you start early. Wealth can be accumulated through a disciplined process of monthly installments called systematic investment plans. Patience must be maintained to reap the maximum benefits of the power of compounding.
These were the purely technical and analytical benefits of investing which can be quantified and shown in numeric terms.
The Qualitative Lens
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Inculcates financial discipline through systematic saving and investing
The world that we live in is filled with materialistic desires. In a competition to prove superiority through materialistic possessions, people often neglect the importance of saving and investing for the future. However, when investing in SIP, discipline is promoted which inculcates the practice of saving a specific amount every month and spending the remaining amount for other expenses. Over time it becomes a habit to save and invest a certain amount of income which can be utilized for wealth creation. For those who earn a lot and have enough surplus face the problem of their money losing its value due to inflation. The solution to all these problems is investing with discipline!
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The benefit of Rupee-Cost Averaging
Timing the market is not possible. The only thing certain is uncertainty when it comes to the markets. However, India is an emerging economy and markets are bound to grow in the long run despite the ups and downs on that path. Investing can help you plan your finances so that you can purchase that expensive watch you like or the car that you love without making a huge dent on your wallet. Saving modest amounts each month and investing them systematically can provide you with the benefit of rupee-cost averaging and that will help you optimize your spending on each mutual fund unit. Due to the volatility in the stock markets, the net asset value of your mutual fund will keep changing, however, with SIP the units purchased will be adjusted to take advantage of discounted prices and buy less when there is a component of premium in the prices.
To conclude, the sooner you start investing regardless of the investment amount you can accumulate wealth through discipline in the long run. Investing when you have enough is a myth, to create wealth while procrastinating is impossible. So start small, but start early and witness the magic of the power of compounding on your own!