Yahoo Finance Here's why you must start investing at a young age
‘We live but only once!’ As tempting it is to follow this rule when you are young, it can cause you more harm than do good. This maxim encourages you to spend most of your income on your current wants, forcing you to ignore your financial future.
A survey revealed that one of the two biggest financial regrets people have are;
not saving enough and
not saving early in life.
Saving as a concept was never really introduced or discussed as we were growing up, forcing most of us to learn it the hard way. Some were introduced to it by their books while others from their experiences, more often as a regret. And therefore, something that should have been a force of habit came to us much later in life.
But even after learning about it, we did not take the right steps, as several myths were floating around to misguide us even further.
A top demotivator to saving and investing is the common belief that you need a truckload of savings to start.
Unfortunately, this is a common myth which puts you right onto the slow train to good financial health. As the earlier you start as an investor, the better off you will be.
Failing to save, even at an early age, can only make your life harder in several ways.
Savings are like a financial cushion of sorts. It protects your financial health in an unforeseen event, like accidents, major repair in the house or if you suddenly find yourself without a source of income. Without this cushion (lack of savings), you might feel compelled to borrow, which can easily jeopardise your financial health.
Savings also help us achieve our long-term goals. In its absence, we can never aim to buy a house, a new car, pay for our child’s education or even retire peacefully.
So, needless to say, building a nest egg is essential. But how can saving early in life benefit us?
Our near-term goals often take precedence over our long-term goals, including retirement planning.
It is very tempting to put off planning for the future while working towards paying off your housing loan and putting kids through school. But that is not a wise move. By delaying planning for the future, you are missing out on a crucial ingredient to financial success: time.
Having time on your side can work wonders for your financial goals. With time on your hand, you can multiply your wealth by taking advantage of the power of compounding.
Let us understand this better:
Principal increases with interest added back (Rs.) | Interest @10% (Rs.) | Total at the end of year(Rs.) | |
Year1 | 1,000 | 100 | 1,100 |
Year2 | 1,100 | 110 | 1,210 |
Year3 | 1,210 | 121 | 1,331 |
Year 1: You invest Rs 1,000 and earn interest or dividend of 10% (Rs.100) on that.
Year 2: The value of your investment increases as interest or dividend is added back and so your Rs 1,000 becomes Rs 1,100. So, now, as the value is slightly higher (Rs 1,100), it earns even more interest. Interest on Rs 1,100 is (10% of Rs 1,100 = Rs 110)
This is then packed back into the investments and it grows even more. Rs 1,100+Rs 110=Rs 1,210.
So, over time your investment value snowballs as a higher amount of money benefits from potential capital appreciation.
Most successful investors started saving and investing at an early age, contributing small amounts.
This habit helped them recognise the value of saving and investing early in life. They realised that if you are unable to save early in life; you will have to put away a lot more later, to make up for the lost time. So a better strategy is to start early, no matter how young you are or how little you can earn and save.
Better understood with an example:
Scenario 1: a couple decides to invest Rs 1,000 for their daughter since her birth.
Scenario 2: Arun invests (once he has earned enough) at the age of 45 years and puts away Rs 40,000 per month towards retirement.
Scenario 3: Anita decides to invest Rs 5,000 after her very first job for 40 years.
Investment Horizon | Savings per month | Magic! (of compounding) | |
Scenario 1 – Parents | 50yrs | Rs 1,000 | Rs 59,827,192 |
Scenario 2 – Arun | 20yrs | Rs 25,000 | Rs 28,329,505 |
Scenario 3 - Anita | 30yrs | Rs 10,000 | Rs 43,728,742 |
Even though Anita saved and invested a lot less (less than half) than Arun, she had an edge as she started investing early. The same applies to the parents who started investing small amounts from the day of their daughters birth. Saving and investing early, even with tiny sums, enabled them to save a lot more than Arun.
Never let your level of earnings or savings demotivate you from saving. As these examples depict; even the tiny amounts of contributions made at regular intervals can add up to a lot, with the power of compounding.
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