Reasons to Begin Investing During Your Youth
Starting early when it comes to investing can offer numerous benefits, making it a wise decision for those looking to build a solid financial future. Here are some key advantages of starting early:
Compound Interest Impact
One of the most significant advantages of starting early is the power of compounding. With compound interest, your investment earnings generate their own earnings over time, leading to exponential growth. Even small contributions made over a long period can build a substantial corpus.
Total Investments Needed
Individuals who start investing early can contribute less overall but still accumulate more wealth. For instance, starting at age 25 and investing regularly for 35 years can yield a larger retirement corpus compared to investing more at older ages over shorter periods.
Improved Spending Habits
Starting to invest early often leads to the development of disciplined saving and spending habits. By prioritizing investing over immediate consumption, early investors can improve their long-term financial stability and enable a better quality of life in the future.
Retirement Corpus
The longer investment horizon significantly increases the size of the retirement corpus due to growth over decades. Starting early provides time to accumulate wealth that can support desired retirement spending and protect against inflation.
Risk-Taking Ability
Younger investors have a higher risk-taking ability due to fewer financial responsibilities and ample time to recover from potential investment losses. This risk tolerance helps them potentially achieve higher returns, accelerating wealth growth.
Case Study
For example, starting retirement savings at 25 allows for the creation of a Rs 4 crore corpus with a total investment of Rs 25 lakh, while starting at 40 requires a total investment of Rs 96 lakh.
Investment Strategy
As age increases, the percentage of investments in equities decreases, with a 45-year-old investing only 55% in equities according to the thumb rule. To make the most of early investment, consider using a mutual fund return calculator to check the potential compounding effects on investments.
Creating a Monthly Budget
To make saving a habit, put away the amount you want to save every month first, then create a monthly budget with the rest of the amount. Creating a monthly budget is an effective way to improve spending habits and track monthly expenditure.
Starting Investments Early
Starting investments early allows for smaller monthly investments to achieve long-term financial goals. For instance, saving Rs 20 lakh in 7 years requires Rs 15,000 per month compared to Rs 25,000 per month if started 2 years later.
In summary, starting early with investments can lead to a larger retirement corpus, improved spending habits, and the opportunity to take advantage of higher risk investments to maximize long-term growth.
Mutual funds, being popular investment vehicles, can help in capitalizing on the power of compound interest when started early, which can lead to significant growth over time in personal-finance matters. Furthermore, individuals who invest early and regularly can accumulate a substantial retirement corpus even with smaller total investments, due to the extended investment horizon and the compounding effect.
