The Allure of Investment Returns

How many times have we wondered about getting that extra investment return by using risky investment products? I have certainly lost a decent amount of money in chasing high returns. The problem was that I felt higher investment returns are necessary if I want to be financially independent. But I couldn't be more wrong.

A 25% return on a small capital of 1 lakh rupees is a meager 25,000. On the other hand, a simple 10% return on one crore comes out to be ten lakhs, which can be many months of expenses for most of us. The more we focus on the savings rate, the less we need to dabble onto risky assets in the lure of high investment returns. We can never control what returns we get, but we can always control our savings.

Why Savings are More Important in the First Ten Years

Let's assume we invest 20,000 rupees per month, and we get a 14% return every year. The above table shows how our money would grow over the next fifteen years if we continue our contribution every month.

• In the first year, the savings are 88% of our total net-worth, while the interest earned (returns) are only 12%.
• In the fifth year, the savings are 66% of our total net-worth. while the interest earned (returns) are 34%.
• In the tenth year, the savings are 45% of our total net-worth. while the interest earned (returns) are 55%.

It's only in the year ten that the returns part of our total net worth is higher than the savings contributed. But even after ten years, savings are a staggering 45% of our entire corpus.

Even at a high return rate of 14%, this calculation shows us that investment returns don't contribute much when we start on our journey. Focusing on savings is more important than beating ourselves about the returns that we get.

The Power of Compounding

This table shows how our investment grows over twenty-five years. It also shows the power of compounding. Compounding is usually back-ended, meaning the real benefits of compounding come later in the investment period.

Compounding is the repeated addition of interest payments to the principal invested over a period of time. The principal grows exponentially as each new payment of interest is added to it. - Investopedia

The power of compounding shows its effect once we enter into the 20th year of our investment journey. The total savings we contributed are only 20 percent of our total net worth, while the returns we earned are a substantial 80 percent. This is how compounding of our money helps us become wealthy and financially independent.

If you had instead used this money for materialistic possessions, it would not have contributed to generating wealth.

Save. Invest. Become Wealthy.