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All of us know the importance of investment but many of us are hesitant to start investing early in our professional lives. We stay more focused on getting new appliances, buying the latest Smartphone and so on. However, the most important fact that people don’t understand is that the smallest of investments can make a very large impact on your finances in the long run.
Many surveys and studies show that the earlier you invest, the richer you get. The right time to invest is during or after you complete your graduation, the age around 20s. If you start investing early, the principle of compounding increases your returns over time. An amount invested in the 20s would give you more returns than even double the same amount invested when you are 40.
By investing at an early stage of life, you learn a pattern of financial independence and discipline. An early investment teaches the real difference between investment and saving. Never think that the young age is a barrier to investing, as you are never too young to invest. The little amount of money invested now will put more money in your pocket in future.
The big money is not in buying & selling but in waiting.Charley Munger
In this post, we will learn 6 reasons why you should start investing early in life.
I) You Can Start with a Small Amount
One of the biggest reasons why you should start investing early is that you can begin investment even with a small amount and can still make a meaningful corpus over the long term.
On the other hand, if you delay your investments, you have invest more money to achieve the same amount.
Let us understand with an example.
Suppose your age is 20 year and you want to retire by the age of 60. Assuming you get 12% annual average return on your investment, then you have 40 years in your hand, a small investment of Rs 1000/- can fetch you a corpus of almost Rs 1.18 Crores by the time you retire. The total investment over this period would be Rs 4.8 Lakhs.
Let us now see what happens if you delay your investment by 10 years and start investing late in life.
Assuming you start investing at the age of 30 years, then you have only 30 years in your hand. To achieve the almost same amount i.e. Rs 1.22 Crores, you have to invest Rs 3,500 per month. The total investment over this period would be Rs 12.60 lakhs.
If you start investing at the age of 40 years, then you have only 20 years in your hand. To achieve the amount of Rs 1.19 Crores, you have to invest Rs 12,000 per month. The total investment over this period would be Rs 28.80 lakhs.
A delay of 10 years in investment cost you 3.5 times more investment to achieve the same financial goal and further delay of 10 years cost you 12 times.
This example shows that anyone can become rich by small investment. You don’t need large capital to become rich and achieve financial independence. You only need to invest for a longer duration.
There are two lessons here, start early and remain invested for as long as you can. For every decade you remain invested, returns are added up disproportionately.
II) Improves Risk- Taking Ability
There is an old saying “Higher the risk, higher the reward”. If you want more return than you have to take more risk. Many studies prove that younger investor have more risk-taking ability than an older one. Adult investors are generally conservative and want more stability in their earning, in turn, they avoid high-risk investment options.
On the other hand, a younger investor is willing to take more risk to earn more return. They have a lot of earning years ahead giving them chance to recover money even if they suffer any loss.
As you grow up, your risk-taking ability will decrease. Your responsibility will increase, your single financial mistake can bring a lot of trouble in your life. As you grow older it is always advisable to shift from high risk such as equities to low-risk assets such as debt fund & fixed deposit.
III) Save More
If you start investing at the starting of your professional career, then you develop disciplined spending habits by focusing on your budget and cutting unnecessary expenses. By following the thought process “The more you save the more you get in future” tend you to cut unnecessary expenses and divert these fund to investment. If you cut a small portion of your expense and divert them in your investment, it will bring increase your corpus multiple times.
IV) Power of Compounding
Compounding work better when you invest for long duration. Let us understand the power of compounding with an example.
Suppose you start investing of Rs 1000 per month at an age of 20 years and continue to invest for the next 40 years then your investment value will become Rs 1.18 crore. By investing only Rs 4.80 lakhs, you will get Rs 1.18 crore. (Assume the interest rate is 12%)
Now compare this performance with your friend who realised the value of investing a little late. He started investing Rs 1000 per month at the age of 30 years. Suppose he also invest for the next 30 years and get the same interest rate of 12%. By investing Rs 3.60 lakhs, he will get Rs 34.95 lakhs after 30 years.
Your other friend started investing Rs 1000 per month at the age of 40 years. By investing Rs 2.40 lakhs over the investment duration of 20 years, he will get Rs 9.89 lakhs.
See the difference starting early can make?
You started early and invested just Rs 4.80 lakhs, and you have Rs 1.18 crore after 40 years. Your friend started after 10 years and he gets Rs 34.95 lakhs after 30 years. Your other friend started at the age of 40 years and he gets only Rs 9.89 lakhs after 20 years.
Just look at the figures and you will realise the importance of starting early. If you start early in your life, you will get more time to keep investing. It is clear that compounding is a powerful tool to grow your money, and the longer you stay, the better it gets.
V) You can retire early
Let us admit that most of us hate our job and none of us want to keep working forever. So, start investing money at an early age will help you to retire early and you will able to enjoy the luxury of life. Early age investment increase the probability of reaching financial stability at a young age. Saving for retirement from the age of 20s rather than the age of 40s is always a better idea.
Now you may ask “How does starting investment early in your life help you in early retirement?”
The answer lies in the “Power of Compounding”. Earlier you start earlier your money start working for you, generating more and more money every year.
VI) Secured Future
Future is unpredictable, there is no guarantee what will happen at the next moment and there is no guarantee that it will keep going forever the way it is going.
I think this is the biggest reason to start investing early so that you become financially secure at a young age and can face any difficulty. I am not scaring you but this is the reality.
Once you become financially secure then you can pursue your dream without worrying about your job, your monthly bills, and most of all, what if you lose your job?
Due to the lack of financial education in our life, we don’t understand the benefits of starting early.
However, with better access to technology, more and more youngsters are educating themselves about their financial life and how they can become financially independent. In today technology world, you have many platforms to learn which investment is best. With the use of technology at a younger age, you can invest in avenues that can give a higher return. An investment with self-research gives you confidence and helps you take more bold decisions in future life.
The earlier you start, the easier is to build wealth. You may face difficulty to invest early in life as you don’t have enough money. But you can’t wait for the time when things get convenient for you. You can start investment with smaller amount and give time to your investment.
I hope that you like all these reasons why you should start investing early. Do let me know why you have invested or want to start investing. What are your hopes and aspirations?
If you have more reasons than you can comment below. I will be eagerly waiting for your comment.