Start Young - Start Smart - Top 3 Benefits of Investing Early
Written on Friday, November 3, 2017
By Viswajeet Parashar - Senior V.P and Group Head - Marketingh
'Income minus saving equals to expenses’ rather than ‘Income minus expenses equal to saving.’
An average individual's life goes through various phases- Early Career, Marriage, Kids, Grown-up Children and Retirement. Each phase can be identified with specific financial responsibilities or needs. For example the goal of car or bike purchasing during early career phase, home buying after marriage. Then comes child upbringing, their education, their marriage etc and finally retirement. In short, fulfilling financial needs is a continuous process and to embark sufficient funds to best meet the financial responsibilities at each phase of life, one needs to start young and start smart with investment. But, ironically, at a young age, the practice of investing is largely ignored or procrastinated owing to the attitude or belief that ‘investing can wait’ or ' there is still time.'
But if you are looking forward to creating wealth through investments, then this attitude won't help. Here, your success recipe is to start investing as early as possible. Read on to know more about the benefits you will get by starting early investment.
Enough Time For Goal-based Investing
It is always better and easier to plan one’s journey after deciding the destination. A planned itinerary certainly helps in making an efficient and optimum use of the available resources. Similarly, life goals need to be identified upfront before one starts saving or investing towards them. If you start your financial planning as soon as you start earning then, you will have enough time for goal-based investing, which ensures that every phase of life you will be financially prepared.
Goal-setting starts with identifying various short-medium-long term goals. Saving for an expense such as an annual vacation or buying a furniture in the next 12 months may be a short-term goal while saving for home loan down payment over next 3-5 years maybe one’s medium-term goal. Long-term goals may include child education, marriage needs or funding one’s own retirement.
The identified goals need to be well-defined by assigning it a value and a time horizon to achieve it. There should be clarity on the goals that you wish to achieve. It also helps in proper linking of the goal to the right investment product. An attempt to meet a medium-term goal by linking it to a long-term product may not have the desired result.
If one plans and sets the goals in advance, managing and controlling one’s finance gets easier. Any short-term temptation to divert funds towards immediate and discretionary needs gets curbed. Impulsive buying may also take a back seat. Setting goals in advance help in proper utilization of available resources i.e. investable surplus.
The Mega Benefit- Power of Compounding
The advantage of the power of compounding increases by manifold when you start investing early because in that way you give more time to your money to grow. If you start investing early, even in small amounts, it will help build a sizeable savings portfolio. The rule is to invest regularly and keep investing the returns. As a result, your earnings will also participate in getting more returns.
Illustratively, A invests Rs 2,500 every month beginning at the age of 25. And consider B, his friend of the same age, who enjoys the moment. After 10 years of living for the moment, B wakes up and starts to save. He begins to invest Rs 5,000 per month beginning at 35. When both A and B turn 45, on a realistic 12 percent return, A’s kitty turns to a sizeable Rs 22.78 lakh, while B’s is nearly half as much at Rs 11.09 lakh, despite B investing more than A. With age on the side of most youngsters, you can avoid the same predicament as B.
Optimum Eligibility For Equity Mutual Funds
Equity Mutual Funds are considered to be high-yielding investment products with potential for high returns. But being market linked, returns from equities are always unpredictable and often termed as risky. But an early beginning with equity mutual fund gives the maximum advantage because an early bird always has the time to remain invested for a longer time. Markets remain volatile in the short-to-medium term but average-out over the longer horizon. An investor, who has invested for the long term can remain poised and undisturbed by such ups and downs or fluctuations of the market.
People with age advantage can extract the best benefits from the act of investing because early start provides them enough time to remain invested to reap the benefits of the power of compounding. Also, they can actively indulge in equity investments and the time advantage average out the highs and lows of the Equity Market. Thus, if you look forward to being financially prepared for every stage of your life, then start investing as early as possible- Start Young – Start Smart.