5 Reasons Why You Should Start Investing Young
In our early or mid-20s, when we start our first jobs, the salary amount that we receive is not very high. Now, from that, we have to manage all our monthly expenses like rent, food, commute, etc. And with the new-found freedom of having money in hand, the urge to spend is more. And, at this life stage, saving and investing are the last things in our minds.
However, there are several perks of starting investments early. And in this blog, we will talk all about that.
Here are the 5 reasons why you should start your investments early Number 1: Since investment tenure is longer, investment amount can be small
We all have dreams, like buying our favourite car or having a destination wedding, which we want to achieve. For example, say you want to get married 7 years down the line, and for this, you need to save Rs 20 lakh. You decide to invest in equity mutual funds, and though mutual funds do not provide any guaranteed returns, the long-term returns for them are in the 12% range. Now for saving Rs 20 lakh in 7 years, you would have to invest Rs 15,000 every month. And the total investment amount would be Rs 12 lakh.
Meanwhile, if you start investing towards the goal 2 years later, then you would have to invest Rs 25,000 per month to achieve that goal in a timely manner. Moreover, the total investments would be Rs 15 lakh.
Similarly for every goal, be it for buying a house or saving for retirement, if you start early then the monthly investments and the total investment amount would be much lesser than if you delay the goal.
Number 2: Starting investment early improves your spending habit:
If you make the habit of saving/investing early on it will automatically improve your spending habit. We will explain how.
When you want to save a fixed amount from your fixed salary, you will have to put a restriction on your spending by creating a monthly budget for yourself. And having a budget is the best way to improve your spending habits as it helps you track your monthly expenditure on food, utilities, rent, leisurely activities, etc. And with years of practice, this simple task becomes a habit.
Now, to make saving a habit, put away the amount you want to save every month first. And then create a monthly budget with the amount that you have left. For example, if you earn Rs 25,000 every month and want to save Rs 5,000. Then as soon as you receive your salary, first put away the Rs 5,000, then maintain your expenditure with the rest of the amount.
Number 3: You enjoy the benefit of compounding.
The earlier you start investing, the more you enjoy the benefit of compounding as you stay invested longer.
Let’s understand this with two examples. Say you want to save Rs 4 crore for your retirement. In the first case, you start investing in an equity mutual fund at the age of 25. And for this, every month you would need to save Rs 6,000 till the age of 60. And in the next 35 years, you would be investing Rs 25.2 lakh in total.
In the second case, you delay the goal by 15 years and start saving towards retirement at the age of 40. The target amount remains the same, i.e Rs 4 crore. Now, this delay will mean your monthly investments would be Rs 40,000, and the total investment amount would be Rs 96 lakh.
So, for delaying the investment by 15 years, your monthly investment amount increases more than 6 times and the total investment amount is 4 times more. This is how compounding works over the years.
Number 4: You can accumulate a larger corpus for staying invested longer
Since you can have the benefit of compounding longer for staying invested longer, the corpus accumulated over the years will also be much higher.
To explain this, we can take the cue from the point discussed earlier. While talking about the benefits of compounding, we explained that even by investing only Rs 6,000 per month you can create a corpus Rs 4 crore just by starting early, at 25, and staying invested for as long as 35.
But if you start investing 15 years late and decide to keep the investment amount the same amount, Rs 6,000, you would be able to save Rs 59 lakh in 20 years. (In both cases, you invest till the age of 60). And if you want to create a corpus of Rs 4 crore in these 20 years, then you will have to keep investing Rs 40,000 till the end of the tenure.
Hence, it’s always beneficial to start early and stay invested for longer to accumulate a large corpus without feeling the pinch in your pocket or compromising on your daily standard of life.
Number 5: You have a higher risk-taking ability
When you are young, you have the chance to take more risks than at a later stage in life. At this age, your financial responsibilities are less, so you don’t have to think too much before investing your money in a risky product. And even if you go wrong with your investments, you would have ample time to correct your mistakes and recover from it in the future.
For example, the thumb rule for investing in equity is 100 — your age. That is, if you are 30, then you can invest 70% in equities and the rest in fixed-income investments. Now, say you are 22 years old, then as per the thumb rule, you can invest up to 80% in equities. But if you start your investments at 45, you might not prefer to take that much of a risk and as per the thumb rule, invest only 55% in equities.
And even though equities are riskier than fixed income products, they have the potential to give you higher returns in the long run helping you to create a larger corpus for a smaller investment amount.
So if you haven’t already started your investment process, start today. Start small, keep it simple, and keep learning with the time. Remember, wealth creation is a long-term process and there is no shortcut to it. And as a young earner, the biggest advantage that you have is — Time!
Originally published at https://www.etmoney.com.