Got your first salary?? I am sure you want to buy that beautiful dress that you were planning to buy, or maybe you wanna buy that expensive leather jacket which you saw on that mannequin the other day. Whatever may be the reason, but investing that money would be the last thought on your mind. Am I right? If the answer is yes, then you have clicked on the right link. This article is for you.
Though the title of the article reads as “5 Reasons to Start Investing Before 25”, I do encourage you all to go through the article and start investing if you haven’t already. As they say, It is never too late to start if you are really committed to your goal.
Let’s analyze the accompanying graph published by the Securities and Exchange Board of India (SEBI). We can see that, on an average, there are three phases of a human. Phase 1 is mostly occupied by education. Phase 2 is, in general, the earning period, where we spent most of our time working. Phase 3 is somewhat termed as a retirement phase of where we permanently leave the workforce behind start enjoying Mondays (;b). In this article, I am more focused on phase 2 so that you don’t have to worry about anything in your phase 3 (for ease of calculation we will consider earning years like 35 years.).
Financial reason – the magic of compounding
Remember that chapter from the school where some random guy Rahul used to keep ₹1000 in a bank account at 8% interest compounded annually and we were supposed to calculate his earnings over the next few years? Yes, you are right, I am going that back. If you observe, the longer the money compounds, the higher its value becomes.
To put it simple words, Compound interest is the interest earned on interest. By continuously reinvesting your earnings, you are exponentially increasing your return on investment (see accompanying graph). The quote by one of the smartest people ever walked our planet Albert Einstein says – “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
Time allows you to take risk
Do you know when Warren Buffett made his first stock purchase?? At the tender age of 11. Yes, you read that right, he made his first investment at the age of 11 with his sister. Investing in the stock market is indeed a risk but so is life. It is impossible to predict the future and sometimes life does not give you an early notification to prepare for the setbacks.
So why you should start early? The only reason I could think of is that an investor’s age has a great influence on the amount of risk he or she can take. If you start early, you have an advantage over others and will be able to try new formulas. You can be more aggressive with your investment decisions and gain more insights into the high-risk equity market.
As you grow old, you are more concerned about your family and kids. In this stage, you are less likely to make brave financial decisions because it may disrupt your saving corpus
Improved spending habits
Investing early allows you to make your budget as soon as you receive your salary or at the start of the month for business people. You can cut down on your unnecessary spending, and focus on investing.
The goal here is to make money by investing money in the right scheme or in the right stock at the right time. This is impossible with poor spending habits and a life full of impulse buying. Whenever you want to buy something I would suggest you try classifying if it is a need or a luxury. If it is a need then you should definitely go ahead and buy otherwise you know it can just wait.
Better quality of life
Investing early gives you the required freedom to follow your dreams and fewer worries about the unpredictable financial future. I do not intend to scare you, but this is a harsh reality. Who does not want to follow their dreams and live life on their own terms? Well, financial security gives you that freedom. Once you are financially secure, you will be able to on something which you really care about. You no more have to worry about your job, your monthly bills, and loan payments.
Be a step ahead of everyone else
The earlier you start saving and investing, the better your financial situation will be down the line.
Compared to your peers, you have chosen to invest early in your life, over time you will be able to afford and do things that others cannot. In other words, you are way ahead of everyone else.
Have a look at the following example which will help you to visualize the situation here:-
Susan, Bill, and Chris start investing the same amount of money but at different stages of life. Susan started at $5000 annually for 10 years starting from the age of 25. Bill starts investing $5000 annually starting from age 35 till 65. However, Chris starts with the same amount from age 25 till 65.
|Total Investment ($)||50,000||150,000||200,000|
|Wealth accumulated ($)||602,070||540,741||1,142,811|
If you have a close look at the graph, all three have seen exponential growth in their wealth. However, at the age of 65, percentage change for Susan’s accumulated wealth stood at 1104.14%, for Bill it was 260.49%, and for Chris it was 471.40%.
There has been a dearth of financial literacy in our country, due to which many of us do not give attention to the investment that it deserves. They fell short of understanding the importance of saving, investing, and the magic of compounding.
However, with better access to technology, more and more people are educating themselves about financial security, stability and are learning to defeat inflation.
I hope you liked the article and the reasons enlisted.
Feel free to share it with your peers and social groups. Do let me know your thoughts in the comments section below.