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Opportunity Cost & Net Worth

Top of the chart ways to increase investment returns and build a sizeable net worth – timing your entry into an investment or identifying undervalued asset and deploying big bucks into it. Said investment can be anything – a piece of real estate or stocks or anything else. It is another story that getting it spot on consistently is not a piece of cake.  

What is easy though is to get a hang of opportunity cost. For starters, it can help you save more, which in turn generates more capital, the raw material for investing. As a bonus, it can also help you direct more money into growth investments.

Let the numbers come to our help. Say somehow you are able to squeeze additional savings of just INR 10/- per day. That’s just INR 3650/- per year. Easy no? And you keep doing it day after day for next 25 years. And somehow you are also able to invest this savings into an investment yielding, say 6% per annum. After 25 years, you end up with a tidy sum of INR 2,11,769/- Lacs against a capital of INR 91,250/-. Doesn’t look much, but do recall, a measly 10 bucks per day got you a sizeable amount over capital invested. Anything extra is always worth something.

What if – the investment you chose gave 10% per annum? Now, the end of period investment value goes upto INR 4,08,009/-, which is nearly 4.5 times the capital invested. That’s essentially 10 bucks growing to 45 bucks. Means more than “something” now.

Let’s scale up and put in some more raw material.

What if – you are able to squeeze INR 100/- per day? That’s still INR 36,500/- per year. Still not that difficult for most of us, I would say. What does end period value of our savings of INR 912,500/- over a period of 25 years look like:

-          @ 6% per annum returns, we get INR 21,17,691/-

-          @ 10% per annum returns, we get INR 40,80,088/-. For better impact, each INR 100/- saved is now worth INR 447/-

Surely means a lot now. And that’s why Starbucks coffee looks pretty expensive to me!!!

Now, instead of meagre amounts, lets look at what big ticket savings can do. What if – instead of ploughing down INR 20 Lacs in a car, you go for a bit less feature loaded car, save and invest INR 5 Lacs. In 25 years, this INR 5 Lacs will be worth:

-          INR 21.46 Lacs @ 6% per annum return

-          INR 54.17 Lacs @ 10% per annum return

You decide if extra features are worth the opportunity cost!!! 

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