Vishal had been saving since he was 16. Sachin only started when he was 27. What difference has it made?

Vishal and Sachin are old friends. They first met at school and have been inseparable ever since. Now they're old married men of 35.

Vishal's always liked the idea of having a little bit put away. In fact he's been saving Rs.50 a month ever since he was 16. Sachin always meant to do the same, but somehow he just didn't get around to it. He finally opened his savings bank account when he was 27. He's putting Rs.50 a month into it as well.

Sachin expects Vishal to have more savings than him – after all, he's been adding money to his account for nine years more. But he sees that Vishal has even more stashed away than he thought. Both accounts have been growing at 5% a year. He doesn't understand it. What's been going on?

Here's what Sachin expected to see:

Vishal's savings: Rs.11,970
Sachin's savings: Rs.5,040

But this is what's happened:

Vishal's savings: Rs.18,942
Sachin's savings: Rs.5,957

What's happened is compound interest. Every month, Vishal is earning interest not only on the total he's deposited but also on the interest he's earned to date. That means, as the months go by and the interest clocks up, he benefits even more – his growing interest is also earning interest!

Of course, Sachin benefits from compound interest too. But because Vishal's savings have had much longer to grow, they've done better out of it. Sachin jokes that he's going to tell his five-year-old daughter to start saving just as soon as she can.