Life continues to evolve. From being a toddler, living off your parents’ income to being an adult, managing all monthly expenses on our own. Naturally, with age, one’s responsibility increases. And so do the expenses. While there can’t be any guarantee over life’s uncertainties, disciplined investing can cushion the blow, at least from the financial perspective.
Here are the 5 reasons why you should start your investments early
1) Wealth building is a long term process:
Always remember, Rome was not built in a day. Similarly, wealth building also happens gradually. The early starters have the benefit of generating more returns at a lower investment amount. While a late starter will have to invest more to generate a similar kind of return. For example, you are investing Rs 25,000/month in stocks that generates around 12% returns. After 10 years, you would have invested Rs 30 lakhs and your investment value would be Rs 56 lakhs! Now, if you start investing 2 years later in the same set of stocks, your investment would jump up to Rs 40,000/month to generate the same value after 10 years. This example proves how time is a friend for those who start their investment journey early.
2) Improves your spending habits:
Investment habits develop a sense of responsibility in an individual. Without investment, a lot of the earning could divert towards unwarranted expenses. The investment brings in a goal-based approach to the expenses and prepares an individual well for future uncertainties. Dedicated investment goals help you to track your monthly expenditure on food, utilities, rent, leisurely activities, etc. And with years of practice, this simple task becomes a habit.
3) Power of compounding :
Compounding is a sure shot method of making your money work for you. The beauty of compounding is that an investor can earn returns not just on principal but on his returns as well. Thus, creating a snowball effect, helping your investments to grow quickly. Here’s an example to highlight the power of compounding. Arun and Varun both invest Rs 1,00,000 each in an investment avenue that offers an annual interest rate of 10% for 10 years. While Arun chooses simple interest, Varun opts for compound interest. At the end of 10 years, Arun would make a total corpus of Rs 2 lakh (Principal+Interest). On the other hand, Varun would earn a corpus of Rs. 2.59 lakh.
4) High risk-taking ability:
Investment, when started early, provides a lot of self-learning opportunities. It also increases the risk-taking ability and provides course-correction opportunities when certain decisions go wrong. For a late entrant, the scope of making mistakes is very limited. Younger investors also have higher flexibility in terms of taking risks. Hence, they can afford to have higher exposure to high-risk high-gain assets like equity. As per the thumb rule, equity exposure can be determined by subtracting your age out of 100 (100 – your age). That is, if you are 20, then you can invest 80% in equities and the rest in fixed-income investments. So, at 35 years of age, the thumb rule allows only up to 65% exposure into the equities. This ratio continues to go down with age.
5) Secured future :
An individual has many goals to achieve during his lifetime. i.e buying a house, car, foreign trip, saving for retirement etc. Starting early investment along with the power of compounding can remove financial hurdles from your path. Wealth is crucial for fulfilling responsibilities, meeting your goals, and efficiently managing unforeseen situations.