The idea of saving and investing for the future is easier said than done. For a lot of young individuals, investing for their retirement may not be the most important thing in their mind when they start their career. However, saving and investing, as with other important things in life, works best with an early start.
If you have ever invested in the stock market you would agree that investing is one of the best ways to create a passive source of income, whereas investing early, has even bigger advantages. There are several benefits associated with investing early such as compound interest, time, risk and experience.
However, if you’re still on the fence about investing, here are a few reasons which prove why it’s best to start sooner than later.
- Wealth creation
What’s the basic aim of any form of investment? Wealth Creation! And the art of creating wealth takes time. There’s a big misconception amongst people that to get huge returns you have to make a huge investment. However, that’s not exactly the case. The big money is not in buying and selling – ‘discipline, patience and early investment’ can also lead to high compounding returns.
More time to accumulate wealth is one of the big advantage younger generations have as compared to older generations. Any rational investor usually understands the benefit of investing early and taking advantage of potential gains from compound interest. To help you understand how ULIPs work in getting high compounding interest, here’s an example.
|Details||Ankita (Age -25 Years)||Vaibhav (Age -35 Years)|
|Amount Invested (Monthly)||5000||5000|
|Age at the end of investment||60 years||60 years|
|Number of years of Investment||35||25|
|Total Amount Invested||21 Lacs||15 Lacs|
|Rate of return||10%||10%|
|Corpus at the end of investment||1.91 Cr||66.8 Lacs|
In this example, ‘Ankita’ who began investing early and invested 5000 p.m. for 35 years to earn compound interest has 1.91 Cr which is way more than ‘Vaibhav’ who invested for 25 years. Even if Ankita and Vaibhav spent the same amount with the same rate of return but Ankita ended up having a larger corpus. This is because she started 10 years early and the power of compounding well worked in her favour.
- Improves Spending Habits
Most youngsters rely on their family members to fund their expenses until they start working. The financial independence that one achieves with their first job allows them to spend on several luxury items and somehow overlook investing and savings. However, when a person starts investing at an early age, it inculcates financial discipline ensuring unnecessary expenses are avoided. The early habit of financial discipline by investing early helps you grow a positive habit of saving and spending. It mainly allows you to develop a good sense of spending habits by focusing on budget and cutting expenses when needed. Those who invest early are very careful with their money and much less likely to have issues over the long run.
- Your Age is Directly Related to Your Risk-Taking Appetite
Before we try to understand the term risk appetite, let us try to understand what exactly is ‘risk’. To put it simply, the risk is an outcome or result, whereas while you assume risk as an investor, it can be either gain or loss. The term ‘risk appetite’ refers to one’s willingness to take a risk.
Your age plays a vital role to determine your risk appetite. One of the biggest advantages of early investment is that you can take as many risks as you like. Young people, with years of earning ahead of them, gives you a chance to make mistakes and fix them if you deviate from your financial goals. Also, as a young adult, you can be more aggressive with your investment approach and increase your exposure to the high risk equity market that also provide higher returns for the risk taken. However, for individuals reaching retirement have no room to make mistakes and may just gravitate towards low-risk or risk-free investments.
- Retirement Will Be Less Scary for You
Today, many people that are nearing their retirement age are facing rather a large problem – they don’t have savings for retirement or what they have saved is simply not enough. If retirement were round the corner, having no investment could be an issue, however, if you start investing early you could avoid making impulsive decisions when you’re nearing retirement.
Developing a retirement corpus is perhaps the most common long term goal for almost every salaried individual, but succeeding in the goal isn’t likely to happen by accident. It takes proper planning with enough knowledge at an early stage of your life to start investing in your retirement funds. Saving for retirement from the age of 20s than the age of 40s is always the better idea.
Views expressed in this article are the personal opinion of Santosh Agarwal, Head- Life Insurance, Policybazaar.com.