When should we start saving?

I was recently asked this question by a friend of mine and i thought i would write this post to explain the answer.

The answer is really quite simple-- As early as possible.

if you save 1000 rs / annum for 2 years and if you save it for 5 years -- you will save 2000/- and 5000/- respectively.

Simple right?

Let me add another complexity into this calculation.. the money saved for 2 yrs will be MORE than 2000/- and the money saved for 5 yrs will be MORE than 5000/-...

Why?
Because each year you save-- the money earns INTEREST!!

and each yr you save-- the money earns interest on the prinicipal+ interest earned last year..


I am enclosing an xl sheet which you can use to understand what the amount saved will be if you start saving Rs 1L per annum till you are 60.

http://rapidshare.com/files/329329903/Compounding_example.xls
( you can download it using the link on top)

In that if you are saving Rs 1L

from the age of 25 ( ensure cell J4 is 25) you will save 36,24,057/-
from the age of 20 ( ensure cell J4 is 20) you will save 54,49,217/-

Hey this is definately not the same as 5 years of saving 1L each... there is a difference of 18L ... not 5L...WOW!!

that-- is the power of compounding.. and what time can do for you..

so start saving as early as possible..

Happy Investing..!

PS: change the interest earned rate in cell J5 to 10% and see the difference

Starting year                  Saving @60 yrs
25                                    59,02,153
20                                    95,05,270.