20 crore lumpsum, or 10 lakhs per month forever?

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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.

lets begin with the very basics – interest when you take a loan from a bank, you will need to pay them an interest, along with returning the money you took from them – usually referred to as principal. likewise, interest is the assured additional amount you get when you put in an amount of money in your savings bank account, fds, rds or government bonds. when you put in your money, banks or other entities might invest it elsewhere, or essentially try to make more money off it – and assure that you will get say 6% as interest. if they make more, its theirs to keep, and if they fail to make more than 6%, its their loss.
compounding – when the rate of interest is assured, your money will keep compounding after each interest is paid. let me explain. if you have put in 1000rs in a scheme that promises you an interest of 10% once a month, in the first month you will have 1000rs. the second month, you will have 1000rs, plus 10% of 1000rs which is 1100rs. and how much will you have in the thrid month? if you answered 1200rs, you are wrong. beause, in the end of second month, you had 1100rs and 10% of 1100rs is 110rs. hence in third month, you will have 1210rs. see, this 10 additional rupees was the result of compounding – and as long as the rate of interest is fixed, you will always have compounding.

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.

now, lets come back to the main question – 20 crores one time, or 10 lakhs per month forever. for most salaried people, 10 lakhs per month sounds comfortable and you think that’s enough, but once we get down to calculating, you will realize that it in fact the worst option.

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 )

 

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