Charlie Munger –
These words from him are correct in every sense. In US dollar terms, getting to our first $100,000 takes most of the time. In fact, in our journey to net-worth of one million dollars, the first $100,000 takes 25% of the time and rest, i.e. $900,000 comes in only 75% of the time. So in our journey towards one million dollars, 10% of the route requires 25% of the time and rest of the 90% journey happens in 75% of the time!
In Indian terms, similarly, if we want to reach a networth of ten crores, the first crore will take almost half of the time. The reason is that initially, our savings contribute the most to our networth. At the start of our journey, we have to focus on increasing our income and cutting unnecessary expenses to save as much as we can! Once we cross the threshold of one crore the next crore is accumulated in relatively less amount of time, actually very less amount of time.
Let’s consider a scenario where we save ₹15,000 every month and increase it by 10% every year. If this amount is invested at 15% compounded rate, then it takes 6 years for our net worth to reach 20 lakhs. The next 20 lakhs come in only two years.
Continuing our journey on a similar path it will take us 9 years in total to reach a net worth of 70 lakhs. It can be seen that it takes only 2 more years to almost double our net worth.
To reach one crore, we require 13 years and savings will form 39% of our total net-worth. Slowly interest has started working for us as time passes away.
The next crore comes in relatively very less amount of time – 4 years. It takes 13 years to reach one crore, while, to go from there to the next it will only take four years. The time is even less than what we need for our first 20 lakhs. This happens because now our interest is working for us. The snowball for our compounding has started to gather speed. We are earning interest on our interest. When we reach 2 crores, savings form only 31% while rest is the interest.
Continuing our journey it requires following timespan to reach a net worth of 10 crores:
When we reach a net worth of 10 crores savings are only 15% while 85% is just the interest. We all are aware of compounding but don’t really understand it’s workings. We overestimate compounding in the short term and underestimate it in the long run. Compounding is back-ended meaning the real results will start showing at the end. In the above example, after 10 years, the interest begins contributing substantially more than the savings in our total net worth. The first 5 crores take 21 years while the next 5 crores come in just 5 years. If you believe in compounding, then focus on cutting unnecessary expenses, invest the money and forget about it. But also remember that we can save only to an extent and need to also focus on growing income. Believe in the compounding story – it really works. Don’t be greedy over the short term, don’t buy too much of depreciating assets or we will lose these handsome returns in the long term!
Start saving more today 🙂