Borrowing is NEGATIVE compounding….
Most writers of personal finance have spent half their lives talking about the virtues of compounding, well, at least I have. So not compounding your money is bad. That is done and dusted.
What can be worse?
Borrowing. Borrowing is worse than not compounding your money – it is a case of NEGATIVE compounding. It destroys your wealth, make no mistake.
So be careful about how much you borrow – and remember if you HAVE TO BORROW, borrow as small a figure as possible, and for as less a time as possible. I am sure nobody borrows for fun, but try to keep the loan as small as possible.
Having said all that, what can you really do as a youngster:
1. Whether you borrow or invest, TAKE IT SERIOUSLY: ‘Subra Sir I do not know my father looks after my investment’ is the last sentence that I want to hear. See what you are doing, why, what time period, what risk, …etc etc. before you invest or borrow. Do not play blind. In flash or real life 🙂
2. Start tracking an imaginary portfolio and compare yourself to the index or to a few good funds like Hdfc equity, Franklin India Bluechip, Icici Pru discovery, ..and see where you stand. Of course the index should also be a benchmark…
3. Start a PPF account and invest Rs. 3000 a year to start with…apart from your SIP that you will start ASAP.
4. Put a true value on money: If your take home pay is 24,400, please remember a smart phone is 1 months income. Ask yourself do you want to work 2 months just to buy a phone – which you will throw out in 2-3 years time. Translate cravings to number of days wages. It is numbing. For heavens sake use the number post tax number, please!
5. Remember every craving is setting you back from your normal / long term goal of car, housing, baby, own business…etc. So keep your focus on the MAIN GOALS. That will keep you away from distractions. Not easy but worth learning.
6. The greatest ASSET you have is the ‘Present Value of your Future Earnings’ – so go and invest in yourself. Visit places, meet people, do your CFA (from US), Ivy League MBA, …etc…these are going to define how much YOU will have for compounding.
A good amount well compounded for a long time – that, kids, is wealth.
PS: want a feed back – have tried to keep it as jargon free as possible….
Art Harikrish
I came across an example of the power of compounding. This is the beauty of staying invested in a blue chip stock over the long term. 25 shares of Colgate IPO from 1978 became 12800 shares in 2007. Look at their bonus record and the stock split and it becomes obvious.
Bonus Record:
Year Month Ratio No of shares FV
2007 12800 1 ( Stock split 1: 10)
1993 Jan 1:1 1280 10
1991 Sep 3:5 640 10
1989 Oct 1:1 400 10
1987 Oct 1:1 200 10
1985 May 1:1 100 10
1982 May 1:1 50 10
What better example for buying right and sitting tight, but hindsight is better than foresight!! This has helped me to truly understand the magic of compounding as 25 shares of Colgate IPO bought in 1978 would have been worth
1.7 crores over 30 years. Dont forget the dividends too! Hope this opens the eyes of at least one person who reads this as it did mine! Regards, Art
Ankur
Subra sir,
You did not mention your views about borrowing by young people (less than 30 years of age) for buying home.
Shivam
Sir,
This is a great article. You have tried to explain the power of compounding in a very efficient matter. It would be great if you show us the path which we can use. Like which is the best brokerage hose ( You have a huge experience I reckon), how to actually invest in securities ad mutual funds.
The problem I am facing is that even if I have identified business that I would like to invest, I dont know how to invest in them. I am not sure if the brokerage house I select will last 15-20 yrs time horizon of my investment.
subra
personally I never borrowed. Never. However each person has to take his or her own call. ‘Sensible Leverage’ to me is an oxymoron. The real rich do not borrow for consumption – they do borrow for INVESTING. A residential house is CONSUMPTION. Buying a house with leverage and giving it on rent, that, is business.
abhay
Subra sire,
Can you please explain- if inflation is also negative compounding then 100Rs EMI which I am paying today wont be worth 100 ten years down the line.
In such a highly inflated scenario doesnt it make sense to borrow and create assets?
Murali
simple is complex,judging by the way people dont seem to follow these rules
rajivahuja
I have written comments earlier. They did not appear. Will this come. Testing…
subra
rajiv all your comments have appeared..they come from a gmail account…and they now run into 4 pages..last was on 20.march…and then today’s test mail.
if you have written anything on 21, 22, 23….no they have not reached me – have checked in the spam folder too…UNLESS YOU WROTE THEM ON FB…my request is pls do not comment on FB, comment here in the comments box….
subra
yes abhay sounds very simple. Leveraging is fine as long as you know that you will ALWAYS BE able to pay the EMI immaterial of the financial situation. Not otherwise.
Indian Thoughts
I liked last point most. 🙂
Nitin
Simple and lucid !!
Ramesh
Point 4 is really very important. It probably requires hammering it down into our brains (as the adverts do but the opposite).
We should be thinking of having everything we need and doing everything we want, rather than doing everything we need to have everything we want.
Nitin
One complaint for your website:- I guess you have installed some cache related add-on recently. So whenever I come to your site it doesn’t show the updated post.
Others please confirm if it is happening only with me ?
Vince
@Nitin: Yes, I’ve been facing the same issue for a few days. I was assuming it was because I was not clearing my cache regularly.
Pravin
Hi Subra,
Can you please elaborate on home loan for young ppl(below 30). We are a couple(both 27 years old) having a monthly combined income of 1.04L(52:52). We are planning to purchase a flat taking a home loan of 34L and will be paying rest 12L as downpayment(our savings till now for our home. Should we take this much home loan as we both want to purchase flat on our own without any help from our parents or are we over-leveraging our income?
Please help.
Suhas Zore
Hi
Iam also facing same problem of latest post not appearing when I use Mozilla Firefox Browser. However when I use IE ,latest post appears & then I can see it on Mozilla firefox also.
I thought it is was due to company’s network setting. I was wrong.
Feel something to do with Mozilla Firefox
Abhay
Nitin,Vince …the caching issue is seen on firefox but not on IE .
Nitin
I use Firefox and Chrome. And noticed the issue in both the browser. The problem lies with the WordPress Plugin which has been installed on this site.