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| The Power of Compounding: Unlocking Wealth with Systematic Investing Plan (SIP) and Warren Buffett's Success |
The Power of Compounding: Unlocking Wealth with Systematic Investing Plan (SIP) and Warren Buffett's Success
More than
2000 books have also been done on Warren Buffet, in which many sectors of
Warren Buffet are written. But out of all these books, there are only a few
books that point out a very simple yet important factor. The reason for his
success is not that he is a very good investor but one of the main reasons for
his success is that he is a very good investor since childhood. His total worth
is around 84 billion, but do you know that out of 84 billion, he has got at 81
billion after the age of 65. If you are judging his success by his IQ and
efforts, then you are doing wrong because no human being pays attention to the
fact that he has been waiting for more than 50 years. He started doing serious
investing at the age of 10 and become a millionaire by the age of 30. Imagine
he was a normal person in his 20’s focusing on finding his passion, enjoying
his life and roaming here and there and round the age of 30 his net worth is
around $25000 and suppose, he decides to invest at that time and after that
they would also get 22% annual returns which is quite high. And after doing
this, if he retires at the age of 60, then you guess how much his network would
have been? His net worth would have been 11.9 million dollars. Only this net
worth which is not even 0.01% of $84 billion. This is power of compounding.
The
Psychology of Money Book states that
Warren Buffet’s skill is investing and his secret is time. We know a little bit
about compounding, but only a few people can realize its power. People imagine
that if I save so much money, then after soo much time I will get so much money
but when they put compounding in it, there brain is not able to accept thing
well. Its reason author says that general people do linear thinking. For
example, if I tell you 8+8+8+8+8+8+8+8+8, which means 9 times plus 8 then how
much will it be then you will calculate and tell that 72 is, this is call
linear thinking. Compounding comes in exponential thinking. If you treat it
with linear thinking then you will never be able to understand its real power.
Compounding is like planting an oak tree, in which you will not see any
progress within 1 year and in 10 years you will see that tree growing and after
50 years that tree will be so big that you will not be able to believe.
Not everyone
has to be Warren Buffet. Not everyone has that much interest in investing but
every person has to become rich. If you are a student and just starting your
career then I believe that you will not have that much money that you will earn
a lot of money by investing once and forget and let it compound and that amount
is compounding and will make you rich which we also call lump-sum investing
near investing. You may not be able to make such investment. May be ,you do not
have a lot of money right not but you can use one thing which is called magic
of SIP.
You must
know what is this Systematic Investment Plan. Imagine that you are in your 20’s
and to have a good body, you have to look attractive. You go to the gym, you
create a system with hard work and you pay money, and you go to te gym once,
work hard and come back. You take good training and take good diet and work a
lot on it. What do you think that if you go to gym once, once you take a good
diet, will that habit automatically come in you, and automatically those things
will happen again and again? Like you will automatically start going to the gym
every day, will you start taking proper diet and your habit will become?
Obviously not! Imagine what would happen if this really happened. Will it be
fun? Financially, you can create such a habit that you can put on automation.
Once you set up everything by working hard, it will become your financial habit
and will give you very good returns and also make you rich. How is SIP usually,
as your money keeps on reducing automatically in EMI, the amount of money you
set up in SIP automatically every month, like 5000 rupees, 5 thousand rupees
will be saved automatically, every month. Whichever mutual fund you choose, you
will continue to invest in it. This is a very easy way of wealth creation.
According to the NAV, we get some units i.e. Net Assist Value in which whenever
you select equity fund and decide an amount that I will invest this much money
every month. Example – You decide that on the 10th of every month
rupees 5000 will be invested Axis mutual funds. If you set this up the, every
month rupees 5000 will be saved in Axis mutual funds and in this way SIP will
be created. This concept sounds simple and in reality it is so. And its result
are very good in the long term.
As we keep
progressing in your life, we keep becoming financially smart. We come to know
about many investment options in which many times we start investing and that
is good but the problem is that due to this our money gets scattered. Some
money is in fixed deposits, some money is in SIP, some money is in stocks,
bonds, saving accounts, expenses, loans, cards etc. Our money is scattered at
many such places which become very difficult to track.
While
choosing SIP, people tend to ignore many Things we can lead to losses in the
future and which you should avoid.
1. Choose the Right Fund :
Before choosing the mutual fund, you should check the expense ratio.
This is a fee that you have to pay to invest. The company keeps some percent of
the total amount with itself because you do not have to work hard and money is
automatically deducted from your bank. A fund manager of the company is
managing that money and he charges you some money for that work. Many people do
not pay the attention and pay too much.
2. Thinking Short Term :
Author Morgan says that growth is driven by compounding which always
takes time so consider investing as long-term game. If you want to make Quick
Money from the investment then it is not possible. While investing in SIP, you
should also keep in mind the exit mode where many mutual funds charge you even
for withdrawing money which is normally zero to 1% along with tax. Because if
you withdraw your money before 1 year then you have to pay short-term capital
gain tax which is 15% and if you withdraw after 1 year then you have to pay
long-term capital gain tax which is around 10%.
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