The first important question - Why should you invest?
Before answering the questions above, let's understand what happens if you decide not to invest. Suppose you earn 50,000 BDT per month and spend 30,000 BDT on living expenses, including housing, food, transportation, shopping, medical care, etc. The balance of 20,000 BDT is the monthly surplus. For simplicity, let's ignore the impact of personal income tax in this discussion.
Let's make some simple assumptions to illustrate this.
- Your employer is kind and gives you a 10% bonus every year.
- The cost of living is likely to rise by 8% year on year.
- You are 30 years old and plan to retire at 50. This will give you another 20 years of income.
- You are not going to work after retirement.
- Your costs are fixed and no other costs are foreseen
- The balance of 20,000 BDT per month will be kept as cash.
Following these assumptions, as shown in Table 1.1, the cash balance after 20 years will be:
Table: Total cash balance over 20 years
Analyze these numbers and you'll quickly realize that this is a terrifying situation.
|
Years
|
Yearly income
|
Yearly expense
|
Cash retained
|
|
1
|
600,000
|
360,000
|
240,000
|
|
2
|
6,60,000
|
3,88,800
|
2,71,200
|
|
3
|
7,26,000
|
4,19,904
|
3,06,096
|
|
4
|
7,98,600
|
4,53,496
|
3,45,104
|
|
5
|
8,78,460
|
4,89,776
|
3,88,684
|
|
6
|
9,66,306
|
5,28,958
|
4,37,348
|
|
7
|
10,62,937
|
5,71,275
|
4,91,662
|
|
8
|
11,69,230
|
6,16,977
|
5,52,254
|
|
9
|
12,86,153
|
6,66,335
|
6,19,818
|
|
10
|
14,14,769
|
7,19,642
|
6,95,127
|
|
11
|
15,56,245
|
7,77,213
|
7,79,032
|
|
12
|
17,11,870
|
8,39,390
|
8,72,480
|
|
13
|
18,83,057
|
9,06,541
|
9,76,516
|
|
14
|
20,71,363
|
9,79,065
|
10,92,298
|
|
15
|
22,78,499
|
10,57,390
|
12,21,109
|
|
16
|
25,06,349
|
11,41,981
|
13,64,368
|
|
17
|
27,56,984
|
12,33,339
|
15,23,644
|
|
18
|
30,32,682
|
13,32,006
|
17,00,676
|
|
19
|
33,35,950
|
14,38,567
|
18,97,383
|
|
20
|
36,69,545
|
15,53,652
|
21,15,893
|
|
|
|
Total Income
|
17,890,693
|
The above calculations are quite surprising.
- After 20 years of hard work, you have accumulated BDT 7 crore.
- As your expenses are fixed, your lifestyle has remained quite the same over the years.
- BDT 1.7 crore is enough to live for about 8 years after retirement, assuming post-retirement expenses continue to rise by 8%. After the eighth year, you will be in a very difficult position, and you have no savings left to support you.
What would you do if you ran out of money after eight years? How do you finance your life? Is there a sure way to raise more money at the end of 2020?
Consider another scenario where, instead of keeping your cash idle, you decide to invest it in investment options that grow at a rate of 12% per year, as shown in Table 1.2 on the next page. For example, if you save BDT 240,000 in the first year and invest at 12% per annum for 20 years, you will receive BDT 2,067,063 at the end of 20 years.
Your cash balance has increased significantly due to the decision to invest your excess cash. The cash balance increased from BDT 1.7 crore to BDT 4.26 crore. This is 2.4 times more than the norm. This means you are in a much better position to deal with life after retirement.
Table - Cash invested at 12% per annum
|
Years
|
Yearly income
|
Yearly expense
|
Cash retained
|
Retained Cash Invested @12%
|
|
1
|
600,000
|
360,000
|
240,000
|
20,67,063
|
|
2
|
6,60,000
|
3,88,800
|
2,71,200
|
20,85,519
|
|
3
|
7,26,000
|
4,19,904
|
3,06,096
|
21,01,668
|
|
4
|
7,98,600
|
4,53,496
|
3,45,104
|
21,15,621
|
|
5
|
8,78,460
|
4,89,776
|
3,88,684
|
21,27,487
|
|
6
|
9,66,306
|
5,28,958
|
4,37,348
|
21,37,368
|
|
7
|
10,62,937
|
5,71,275
|
4,91,662
|
21,45,363
|
|
8
|
11,69,230
|
6,16,977
|
5,52,254
|
21,51,566
|
|
9
|
12,86,153
|
6,66,335
|
6,19,818
|
21,56,069
|
|
10
|
14,14,769
|
7,19,642
|
6,95,127
|
21,58,959
|
|
11
|
15,56,245
|
7,77,213
|
7,79,032
|
21,60,318
|
|
12
|
17,11,870
|
8,39,390
|
8,72,480
|
21,60,228
|
|
13
|
18,83,057
|
9,06,541
|
9,76,516
|
21,58,765
|
|
14
|
20,71,363
|
9,79,065
|
10,92,298
|
21,56,003
|
|
15
|
22,78,499
|
10,57,390
|
12,21,109
|
21,52,012
|
|
16
|
25,06,349
|
11,41,981
|
13,64,368
|
21,46,859
|
|
17
|
27,56,984
|
12,33,339
|
15,23,644
|
21,40,611
|
|
18
|
30,32,682
|
13,32,006
|
17,00,676
|
21,33,328
|
|
19
|
33,35,950
|
14,38,567
|
18,97,383
|
21,25,069
|
|
20
|
36,69,545
|
15,53,652
|
21,15,893
|
21,15,893
|
|
TOTAL CASH AFTER 20 YEARS
|
4,26,95,771
|
|
Now back to the first question: why invest? There are several good reasons to invest.
- Fight against inflation. Investing can help you deal with the inevitable rise in the cost of living, commonly referred to as inflation.
- Wealth creation. When investing, you can aim to have more wealth by the end of a certain period. In the example above, the period was before retirement, but it could be anything, such as raising children, getting married, buying a house, or retiring.
- To satisfy the financial aspirations of life.
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