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Why it’s important to start investing early

August 5, 2019 . Gourav Kumar

Just got your first salary? Tempted to go out and buy that expensive gadget you’ve been looking at for a while? Think again, maybe you should save some of it for your future.

But why, you ask? Shouldn’t you be able to enjoy your life a bit before you start thinking of these responsibilities?

You definitely should. However, spending too much money enjoying life at a young age may severely hamper how much you can enjoy life at an older age. Here we give you two reasons why you should start saving early.

The Mathematical Reason

Fresh out of college, this reason might appeal more to young minds. You all must have studied compound interest at some point in school or college. If yes, then you would have noticed that the longer the money compounds, the higher its value becomes. Compounding is a polynomial function, with the number of years being the degree of the polynomial. As you can tell from this, the higher number of years would lead to exponential growth.

And starting to invest early is the best way to give your money more time to compound. If you start at the age of 25 and invest till retirement (let’s say 60 years), you would have invested for 35 years. But if you start at the age of 30 you would have invested only for 30 years. So how much difference can this make? Let’s take a look.

Two friends, Isha and Satish start working at the age of 25. Isha starts investing ₹5000 immediately, while Satish spends most of his money and starts investing only at the age of 30. How much difference do you think this would make to their corpus when they’re 60? If we assume a uniform rate of return of 12% per year, at the age of 60, Isha would have accumulated ₹2.76 crore whereas Satish would have ₹1.54 crores.

That’s right, just a small difference of 5 years allowed Isha to accumulate almost 1.8 times the corpus of Satish. That’s the power of compounding. The money invested early on goes on to grow into a huge corpus due to the higher number of years of compounding.

The Psychological Reason

Now let’s come to the psychological aspects of it. There’s a certain inertia that gets built when you start spending all your money. Once you get used to spending your entire salary, it becomes difficult to curtail your expenses later to start saving. Therefore, it is always a good idea to start investing from the beginning.

World-renowned investment expert and proponent of value investing, Warren Buffet says – “Do not save what is left after spending; instead spend what is left after saving.” This should be the mantra of every person. You should plan out your financial goals, see how much you need to save for the future, and then prepare your budget according to what you’ll have remaining in your bank account.

If you inculcate a disciplined approach to saving money from early on, you’ll find it easier to save and invest later on in your life, when your expenses grow along with your responsibilities. The money saved early on will also act as a cushion, in case you hit a rough patch in your career. You’ll have some level of financial independence, and will be able to sustain yourself for a few months without falling back on your friends or family. Thus, having some investments will guarantee mental peace at all times.

Being young also allows you to be more tolerant to risk. You have fewer responsibilities and loads of time on your side. This makes it is easier to absorb any fall in the value of your investments when equity markets are not doing well. This also teaches you a valuable lesson. You learn to be comfortable with the volatility of equity markets. Over a long time, the higher return potential of equity can make you rich. If you start early and become comfortable with the ups and downs of stock markets, you will be able to amass much greater wealth than you would if you simply put your money in a bank.

Don’t Wait, Start Early

This is not an exhaustive list, there are a lot more reasons why starting early is a good idea. Basically, starting early can help you achieve financial independence, help you fulfil your dreams, and help you retire early if you so wish.

Now all this might not make a lot of sense if your income is not big enough to save. However, it is imperative to remember that we are not advocating for saving x% of your salary. The important part is to start saving. Maybe you are posted in an expensive city and your rent takes up a major chunk of your salary. But there’s no harm in starting small. You can start an SIP in an equity mutual funds with just ₹1000. If you save ₹1000 every month in the first year of your career at the age of 25, and it grows at 12% per year, it will add ₹6,01,845 to your retirement corpus. That’s the power of compounding.

 

 

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