A 15 Min Diary: The Magic of Compounding and Financial Planning
And bringing your dreams to reality
As someone who’s pursued science and technology all my life, I never formally explored this world's financial and economic aspects. Well, until 3 years into working as a Software Engineer. Those three years that I was earning but simply keeping money in my savings account will probably cost me crores (or even tens of crores) of rupees. You will understand why by the end of this read.
In hindsight, not being aware of these things was one of the greatest opportunity costs of my life.
In this diary, I want to pen down a few thoughts about financial planning and understanding the scale of “compounding” so that others who are younger and just starting out can make better decisions for their own life — and, more importantly, early decisions that can have ripple effects over time.
🪧 Note: All units and calculations in this diary are in INR, Lakhs, and Crores, which is specific to India. However, similar logic should apply to most parts of the world in their own contexts. Also, all values used are appromixations only.
I often use the analogy of growing a tree to describe financial planning. Let’s say you plant a seed. It grows slowly. Your reward is the fruit it shall bore.
As the tree grows, the number of branches grows, and so do the fruits you get. But what happens when you cut a few branches because you want to build something with them?
The future branches that come out of that branch you cut and the fruits they shall bore are now lost. The branches that you cut when the tree is younger equates to something that could have grown into a huge part of the tree later, dividing into 100s of branches.
Investing, compounding, and generating wealth work similarly.
Cutting branches = Not investing early in life or withdrawing your investments prematurely.
📢 Disclaimer: Like with all my diary entries, these are just my current thoughts and understanding, which evolve continually. Do not take anything here as an “advice”. Please do your analysis and due diligence based on your own context.
Understanding Compounding
Let me re-use my recent LinkedIn post to explain.
Read this carefully and it can completely change your perspective.
Let’s take two people.
PERSON A
- Starts investing at the age of 21.
- Invests 25K INR per month at 15% CAGR (1.25% monthly).
- Invests till the age of 28 and STOPS.
- Actively invests only for 7 years.
PERSON B
- Starts investing at the age of 28.
- Invests 25K INR per month at 15% CAGR.
- Invests till the age of 60.
- Actively invests for 32 years.
Who do you think will have a higher corpus at the age of 60?
Note that person A has invested only for 7 years and literally stopped and just let the corpus grow passively.
On the other hand, person B kept on investing till 60 for 32 long years!
So, basically, when person B was investing throughout their 30s and beyond, person A could be partying every month with that 25K they stopped investing.
One might think that, ok, person B has invested for a longer period of time and also invested a lot more capital than person A. So, naturally, they made a lot more than person A, right?
If you do the actual math, you will find out that Person A will still have a higher corpus than Person B!
At age 60
- PERSON A has ~32 crores.
- PERSON B has ~23 crores.
In spite of investing just for 7 years, Person A has built a corpus that is 9 crores more than Person B.
This is absolute math.
This is a fact. Not some random guesstimate or assumption excluding the only thing that the CAGR (annual returns) is 15% for both of them.
This is very hard for people to grasp. Your brain may not believe it. How can someone who’s been investing for 32 long years make a smaller corpus than someone who just invested for just 7 years earlier in their life?
That’s why people say compounding is the 8th wonder of the world. We are not tuned to understand exponents naturally. You will get it only when you do the math and see it for yourself.
This is exactly what young people miss. The amount of money you invest in your 20s compounds for the rest of your life and exceeds the compounding of the amount you may invest later in life.
Save and invest as much and as early as possible in your 20s.
Gradually increase your spending in your 30s, and that won’t really have a big impact, but miss your 20s — the difference is tens of crores of opportunity costs.
Because of a lack of planning and foresight, most young people tend to spend more in their 20s (as % of their earnings) or just put their savings in a bank account (the mistake that I made) and then realize that they must invest and plan stuff into their 30s.
This is why you may not want to spend more on vehicles, immovable assets, or any big ticket items, lifestyle inflation, social spending, etc. when you are in your 20s.
Also, this is exactly why taking debt early in life is not a good thing, because you could rather pay SIPs instead of EMIs for these few early years.
Just look above. Person B was actively investing 25K INR in their 30s. Person A was chilling, and still, they generated more wealth. This is the key to changing the state of your entire family and future generations.
But young people are reckless and think “YOLO”, or spend impulsively due to random social and peer pressure.
The idea is NOT “Don’t spend anything”. It is about planning, saving, investing first, and then spending what’s left.
Ask yourself.
Do you really, REALLY need that 15 Lakhs car when you are 24 and then take it and pay EMIs till you are 29, at the expense of an opportunity cost of 10 crores?
Just like this, how many expenses can you optimize in your 20s?
How much can you optimize to bring all your EMIs to as little or to absolute zero and your monthly investing budget to the maximum?
Sit down, track where your money is going, and do the math.
Now, what if person A was more thoughtful in their savings in their 20s. They did not buy expensive things they didn’t need. They rented a smaller house as a bachelor. With a bit more planning and mindfulness, let’s say they were able to put in an additional 15K INR every month towards investments.
In this new scenario, we have a monthly investment of 40K INR done for 7 years at a CAGR of 15%. Let’s say, they stop this as before at the age of 28 and let it grow passively.
At 60, their corpus would be ~51 crores, almost 20 crores more than the previous scenario!
15000 INR extra saved per month for 7 years translates to a value of ~20 crores at your retirement.
This lost time in your 20s is lost forever. I made this mistake and already see its effects on my portfolio. The difference remains even if you start investing in your 30s and do everything well.
But what if person A continued investing till 60? Their corpus would then be a whopping ~106 crores!
In your 20s
- When you rent for 20K INR per month instead of 30K INR, it matters.
- When to skip a travel plan and save some 50K extra that year, it matters.
- When you avoid buying expensive 1L+ smartphones that you don’t really need, it matters.
- When you manage to save 2–3 L from your wedding expenses, it matters.
- When you don’t purchase expensive stuff on EMIs, it matters.
And it matters in tens of crores of opportunity costs.
Young people will say, “Abey, yaar, it’s just 5K INR or 10K INR extra to spend”.
Let them know that it matters.
But hey, you might ask, everyone who invests wins in the end. Even making 20 crore corpus like Person B is awesome, right? That’s more than enough for all practical purposes. You are right, but what’s the harm in making these small tweaks to benefit immensely for the rest of your life?
Person A is playing the game at a completely different scale of compounding.
What is the best part of these possibilities?
It’s achievable by most people out there.
You can do it by doing a normal 9 to 5 job. You don’t need to be in the industry's top 1% of talent and jobs. You can achieve this even with a super normal government job or a random private company at normal pay and very gradual growth.
It’s an accessible path for most people.
But what if you are a high achiever who works on high-paying jobs, has ESOPs of growing companies, and all that good stuff? Sure, you will easily make a net worth of 10–20 crores without any planning. But if you plan well, you will likely build a portfolio of 100s of crores.
The next question that might be in some people’s minds — What’s the point? Why do all this optimization and meticulous personal finance planning?
Is it even worth the attention? Can’t we go with the natural flow of life?
I will share my thoughts on what I think.
Planning for the future
Ultimately, everyone makes money as long as they work, save, and invest something. What’s the point of a few 10s or 100s of crores difference?
That’s when it struck me that not everyone has similar goals. So, before you even start planning all this, you must think about an overarching goal you want to achieve.
Here are a few of the goals for which I plan.
- If I have the means to, I want to build a school and a university of my own that provides free or cheap education to people and gives all the top 100 universities in the world a run for their money.
- I also want to hire a lot of people from tier 2/3 cities in India and provide mentorship and careers to them by having them help me run my side projects.
All of this without having to worry about taking debt or raising investor money and trying to churn profits for the sake of it.
So yes, if I make 10 crores in surplus and I am retired with these cashflows, I will use them to do all these things — like starting something born from my passions and hobbies. The more cashflows I have, the more I will be able to do.
Some of you may have your own goals, like wanting to start a cafe in your hometown. Or do you want to start your own library? Or a space observatory?
You may want to build a nice spacious house for your family where you do your own farming, have solar roofs set up, and live in a sustainable fashion.
You may love movies and someday want to produce a movie of your own.
You see, the possibilities are endless. And you can do all such things without the overhead and stress of loans, EMIs, debt, and investors.
If you have an overarching dream, you have to plan to turn it into reality. Going with the “flow” won’t help you reach such milestones.
And the best part is trying something you want to do in life! The journey matters more than the outcome.
Maybe you won’t achieve all the things in this lifetime, but your ideas and goals can be taken up by the people with similar interests who come after you, and your planning can also become their platform.
Creating wealth engines
We live in a very unique time in the entire history of humanity. From the 1990s to the late 2050s is special and driven by capitalistic companies and developing countries.
It’s hard to say how the world evolves far ahead in the future, but in the few decades before and in our times, the economy is an equity-driven economy. All the stuff we discuss here won’t make sense 100 years in the past or future.
Now is the exact time when it all makes sense when the compounding is happening right in front of our eyes. Think about your parents. Let’s do a very conservative estimate if they actually planned their finances and compounded their investments.
Let’s assume a simple NIFTY 50 Index mutual fund. Historical data says that from 1999 to 2022, the CAGR was ~14%.
Let’s assume your parent started working in the 90s and settled into a stable 9 to 5 job. Assume the following:
- They started investing in 1999 in NIFTY 50.
- They started with just 5K INR per month in July 1999.
- Every four years, they increase their monthly investment as they grow in their career, get hikes, promotions, etc.
Investment Periods:
— 1999 to 2004: ₹5,000 per month
— 2004 to 2008: ₹10,000 per month
— 2008 to 2012: ₹20,000 per month
— 2012 to 2016: ₹30,000 per month
— 2016 to 2020: ₹40,000 per month
— 2020 to 2024: ₹50,000 per month
In July 2024, what do you think their corpus value will look like?
The answer is ~ 3 crores.
Let’s say they continue to invest the same 50K per month till July 2029 (another five years) and retire. What happens, then, if Nifty50 continues to grow at an average of 14% CAGR? (Remember, past performance does not indicate future performance, but we can make a basic assumption given the economy and GDP of India are growing at a healthy rate).
At retirement, the corpus will be ~6 crores.
Notice how creating a corpus of 3 crores took 25 years, from 1999 to 2024. But to increase it by another 3 crores, it just took 5 years.
This is COMPOUNDING!
Anyone who did a normal job in their career, getting normal annual hikes, bonuses, promotions, and pay commission revisions, should be able to achieve something like this with the lowest expectations.
Now, go and ask if your parents are sitting with a corpus of about 3 crores at the moment, having started from a lower middle-class or middle-class background with zero inheritance and doing a normal job.
If the answer is yes, they have done a really good job for their time.
People from their generation who have actually done well in their careers and invested diligently are likely sitting with a corpus of tens of crores.
If that’s not the case, it's a clear sign of a lack of education, awareness, and planning on these topics.
The real story starts after this.
If your parents did do well, what they have created is an enormous wealth engine that can potentially create generational wealth for your family.
Let’s say you are 30 years old when your parents retire with a 6 crore corpus. Your parents give you an inheritance of 2 crores from it.
If you put that inheritance in an investment asset that grows at a CAGR of 15% for 20 years, it will grow to ~32 crores when you are 50 years old. That 2 crores became a wealth engine that generated 30 crores by itself.
**Excluding taxes for a simplified outlook
This is solely from your inherited wealth. Assuming you had your own investing journey too, where you started investing at the age of 21, till 50 (29 years) at a CAGR of 15% with a fixed 40K investments per month, what would be the end result? Remember that we are not even considering your career growth, hikes, promotions, etc. Just fixed amounts.
Your personal investment journey generates a wealth of ~23 crores.
Your total net worth is ~55 crores, and you are 50 years old. Let’s say you stop investing now and consolidate all these 55 crores to passively grow at 15% CAGR for another 10 years.
You might still be making money from your job or other assets and stuff, and you are spending it all or buying random things and traveling, etc.
At the age of 60, you check what’s happening to your portfolio.
It will be worth a whopping ~222 crores.
Your parents and yourself, combined, spent almost 60 years helping you create a corpus of 55 crores. This, once again, becomes a wealth engine that passively generated over 150 crores in just 10 years.
Let’s not go into your kid's generation as it's too hard to even think about how the world and the economy will look like.
At 60, you can put some of this portfolio into more stable assets to generate cashflows that you can spend directly.
At this stage, many things become possible. This is just the outcome of your simple investing journey. You will obviously have even more net worth, above and beyond this investment portfolio, saved from your career, bonuses, ESOPs, real estate, EPF, and businesses.
The intuition here is that even if you don’t do any of that and are relatively chill in life, keeping a chill and stable job, you can still achieve big milestones.
Now, think about what kind of platform your children or any other kids from the next generation that you want to sponsor will get.
Phew, a lot of numbers and timelines to take in.
Sit back and let me summarize in a single sentence.
Wealth engines, properly inherited within a family, can create generational wealth for that family.
Now imagine that your spouse and your sibling (and their spouse) are also working and have their own investing journey too. You are not doing this alone.
Do the math for yourself. We are talking about a family wealth in the range of 800 crores. Once again, excluding all the other stuff and assets apart from the equity investment portfolio.
This whole thing is only applicable to our parents, us, and our kids' generation because, after that, the economy might develop to an extent where growth is falling, the population is decreasing, and the markets can stagnate.
I do believe that we are living through one of the most unique periods of human history — the road to exponential growth before it stagnates. No one knows the future, so I could be pretty wrong. Let’s find out with time.
Maybe, growth will continue and won’t stagnate.
Or maybe, our index funds will never grow at 15% CAGR moving forward.
That’s the risk. But still, even if things grow at just 10–12% CAGR, the numbers will be quite significant.
At this stage, I have to add a big disclaimer. Looking at all these numbers and timelines objectively and purely from a logical standpoint is important.
There is no room for emotions here. This is not about thinking “how to make money” or “how to get rich”. It’s about how to generate sustainable wealth over long periods of time. There is a subtle difference. You are not generating wealth to be rich. You are generating it because you have the awareness to generate it and then use it to fund larger projects.
These are small decisions you make in your life, outside of your everyday activities, that work behind the scenes to create wealth engines.
Starry dreams to reality
What should you even do with all this wealth? I have 100s of ideas, but that may not be the case with everyone.
There’s one sad thing in society.
It’s rare to come across starry wide-eyed people these days.
When was the last time you heard someone say, “I have a dream to start my own space observatory and spend my retirement exploring the universe”?
And they could teach observational astronomy to young kids while they are at it, too.
Most of us don’t even believe in ourselves or our dreams and let them be dreams, thinking, “It sounds like a fantasy,”. As we grow older, we are busy looking to survive till the next long weekend and stop thinking of possibilities beyond the veil of structured life.
People think they are not talented or hardworking enough to get high-paying jobs or run successful businesses to generate wealth.
That’s not the only way. These paths are possible even for people who are earning around 70–80K INR per month in today’s time.
People who start their careers making ~30K INR per month can build a great corpus too. Not 100s of crores, but something quite substantial. And above all, this is a generational thing. One good generation, be it your grandparents, parents, or you, can change the future of your entire family.
If you sit down and actually plan, you’ll be surprised. And when you know that things like this are possible, perhaps you will start dreaming again, thinking of new possibilities and here's the path to bring them into reality.
It turned out to be a lot longer than expected. Add all the disclaimers you want. Also, I don’t want this to become another rat race. Think about making simple decisions about your investing budget and how you can maximize savings when you are young.
Put those savings to work by investing in good assets that compound well. A few decades later, it will make all the difference.
You don’t even need to target some number. If, one fine day, you see that you built a corpus where the passive income it generates comfortably exceeds your living expenses, you are ready to retire early, too, and enjoy a more minimalistic life.
Lots of possibilities based on your own unique context.
If you found this insightful, feel free to share it with your parents, siblings, spouse, and friends too. Someone’s entire life journey can change by the decisions we make today.
I want to conclude with this.
A lot of this can be overwhelming too. You may have many responsibilities and unavoidable expenses that do not allow you to invest like this. It’s ok. Look after what works for you and make good use of it whenever you can save a little. That’s the idea.
You may have phases in your life when you take career breaks, have no cashflows, want to reset the clock, etc. But don’t worry about not being able to follow everything and losing out on something. You’ll do well just with the awareness, and when you get good opportunities, use this awareness to seize them.
Until next time.
