a few days ago, i had asked quite a simple question, in my professional group – what would you prefer? a 20cr. lumpsum one time now, or 10 lakhs per month for the rest of your life – and was amazed to see that almost 50% voted to get 10 lakhs per month.
i thought i’d make this quick video and help people understand basic concepts – of interest, compounding, inflation, and other basic finance calculations everyone should usually be aware of.
inflation – inflation is the drop in value of currency over time, and we are all affected by it.
in the earlier times, there used to be 25 paise and 50 paise coins, but today they are extinct because you cant purchase anything with a 25 paise coin! whenever we see the price of a packet of biscuit increasing, it is inflation. today, with 100rs, you might be able to purchase 10 packets of biscuits, but a few years later, you might be able to buy only 8 packets because the price of a packet of biscuit is now 12rs, instead of 10rs. this is why investing your money is very important, since it gets you interest, and the interest should be more than the rate of inflation for the investment to be profitable.
first of all, there is uncertainty. we don’t know when we will die? if i die tomorrow, i would have ended up with just 10 lakhs, instead of 20 crores. and even if i dont die, whats the guarantee that i will keep receiving 10 lakhs every month, if i had instead chosen 20 crores lumpsum, i’d at least have it all.
secondly, inflation. 10 lakhs might sound a lot now, but say 2-3 decades later, you might realize that 10 lakhs is not really a lot. 30 years ago, you could easily buy a big nice house in mumbai for below a crore. but now, just after 30 years, you need to spend more than ten crores to get that same house. inflation is really powerful, because the prices keep increasing year after year, at least in developing countries.
last but not the least, lumpsum is always powerful than anything else as long as the interest rate is assured. if you put in 20 crores in a bank that promises 5% annual rate of interest, you would be looking at 1 crore annual return which is almost 10 lakhs per month. in the other scenario, you would need to keep investing 10 lakhs every month for almost 9 years to get comparable returns, but in those years, the 20 crores you could have put in would be worth a lot lot more (~29.54 crores to be precise )