Author: animeshjmathur

The Magic of Compounding Part I

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In grade 7 I learnt Simple Interest and Compound Interest. Unfortunately for me I never understood the implications of compound interest. So while my teacher at that time did give us a lot of problems to solve, I got bogged down with the numbers and getting the answer right.

Being from a family which had come up the hard way in life, they also did not know what magic compounding and tax efficiency can create.

I used to think that the education system of our time was extremly socialistic where talking about money was not considered a very nice attribute. However even now I see young boys and girls coming out of college …. in today’s time and age …. without the basic understanding of compounding….most think that you need to have a high salary to be able to invest or need to have a large amount to make any difference to their life.

And because I meet a lot of very talented people, including finance people and chartered accounts, I see them missing this very fundamental issue of life and hence I am ranting about this so emphatically. My next few posts will only focus on this issue

Which brings me to the equation of compounding I learnt in class 7.
S=P*(1+R/100)^N
S is the sum of money
P is the principal amount of investment
R is the rate of interest and
N is the number of years…(there are some variations to this but we will keep it simple)

The magic is caused because of the exponential power in the equation. So while P may have a small role to play it is the number in the bracket which get multiplied exponentially that creates the magic.

So to all of you who think you need to have large amount of money to be able to invest, please look at this equation again.

Till next time….Carpe Diem

Savings versus investments

Financial Independence

In my previous post I had mentioned that there’s a difference between savings and investments.

I had a typical middle class up-bringing which laid emphasis on studying hard, becoming an engineer and then getting a good job and working hard. Each year year I used to get an increment. After the first month’s euphoria of the increased salary, the salary always felt less at the end of the month.

Based on my salary I used to try and put away some money into the bank fixed deposit or recurring deposit. But inspite of all the effort at SAVING money I was at the same place financially. I was walking on a treadmill!!!

A few years back rummaging through some old papers I got a receipt of an INVESTMENT of Rs2000 I had made in 1994. That had over the years become close to Rs 100000/-.

That’s when I started analysing, reading books etc. to understand what was it that I was doing wrong. This is what I realised

1. Savings are what you take out from your earnings after you have consumed. You put them in a bank because they are safe but they earn a low level of interest and you PAY TAX on the interest you earn, at the level of income tax.

2. Investment is what you take out of your Savings to help build your CAPITAL. Wealth is only built by making investments. TAX RATES for investments are generally lower, which means you earn more and pay less tax.

This does not mean you should not have FDs….they have a basic advantage of being quick, safe & ready to use when you want it. However you need to decide how much is that emergency cash which you absolutely need and then cart away a certain amount to ensure you build Wealth by making Investments.

Till next time…

Doubling of farm incomes in India by 2022….and what it means for you and me

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In this year’s address to the nation (India) on our Independence Day the PM spoke about doubling of farm incomes by 2022.

If we keep the political issues involved out of the way and just look at the impact this could have – if it becomes a reality – on all of us in India.

Since a major portion of the 125 crore (1.25 billion) Indian population still stays in the hinterland, doubling of incomes over there will mean a burst of consumption at the grass root level.  The cascading effect of that is unthinkable.  the demand for soaps & biscuits to paints & automobiles and just about everything in between will be mind boggling.  Companies which can meet this demand will grow geometrically forward.  Which will in turn need a higher amount of services and infrastructure.  From a approximately 2 trillion dollar economy we could become 5 trillion dollar in no time and the wealth that will create.

If you are young and systematically invest (not save….I will take this up in my next post) into this economy, you will create massive wealth.  You have a bright future….invest in it now.

First blog post

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Hi! Everyone,

Its been sometime since I have been thinking on how I can impact the world a little more.

I will rant on a lot of things as we go forward, but the overall idea is to help people get financial freedom, which I learned the hard way and I see most people struggle through life.

While doing so I also want to do some good.  Eventually I will be generating revenue from this site and intend to use part of the profits to feed children nutritious meals and to help women get better lives.