Sanjay and Akshay began their corporate careers together. They both dreamed of owning a luxury car.
Their salary had increased significantly in 2017.

Sanjay was considering an Audi A4. Sanjay decided that now would be a good time to purchase the Audi because he could comfortably afford the EMI. The car would cost him 41.5 lakhs. 
He applied for a car loan for 80% of the car’s value for 5 years with a 20% (~8.3 lakhs) down payment. Each year, he spent almost 8.2 lakhs on EMIs.

Akshay had different ideas. He did not want to go for a luxury car right away. He purchased a high variant of Maruti Swift Dzire for 8.3 lakhs approx. He invested the 8.2 lakhs each year, that Sanjay paid in EMIs, into the Nifty index over a five-year period.

Sanjay finished repaying his loans at the end of 2021.

At the same time, Akshay was hoping to purchase the identical Audi A4. Today, he would have to pay 46 lakhs for the same car.
However, considering the post-tax returns from the nifty over the previous five years, his assets had increased to roughly 58 lakhs.
Without taking out any loans, he was able to finance his dream car and had an extra 12 lakhs or so.

In these five years, Sanjay’s car value decreased by 50%. In a few years, he should start looking for a new vehicle.

He is currently unable to escape this lifestyle trap and is once more considering taking out EMIs to buy a new luxury car. This cycle goes on.

Planning and Patience pay off in the long term.

#luxury #Merc #Benz #Patience #planning

When it comes to investing, there are several things that are not in our control as investors. The economic conditions, events triggering changes in the market, how the market reacts to such conditions and hence the returns in the near term, and so on.

But there are still some things that we (the investors) can influence.

1.           The amount we can put into investments

2.           The time period of our investments

In the Compound Interest formulae, out of three factors namely, invested amount, interest (returns), and the number of years invested, we focus more on the returns, while the other two also influence the overall growth of the investment fund.

Here is an illustration where Amit and Ajay begin investing Rs.1 lakh each year (about Rs.8000 per month) into a well-researched product. As soon as he received his raise, Ajay made a conscious decision to raise his investments by 10% annually.  Both of them continued to invest for 20 years without redeeming at any time during the period.

Here are some observations from the 20 years of their investment journey.

At the end of the 20 years period, Ajay had made more than 100% of what Amit made!

Amounts highlighted in ‘Blue’ are where additional 5 lakhs were achieved. During his fourth year, Amit earned his first “5 Lakhs.” His subsequent “5 Lakhs” was made in under three years. He started making “5 Lakhs” every year after 13 years of consistent investments. This is the magic of compounding!

Ajay achieved the same even sooner than Amit.

After all, we are making an investment toward our goal, and achieving that goal is our first priority. Hence, it is prudent to take advantage of the factors we have under our control rather than solely relying on external factors to build investments.

#Consistency #Compounding #Investment #planning