Why Start Investing Early

30/11/2012

Not many people think about financial commitments and retirement when they start their career. Investments at this stage in life may be restricted to the compulsory EPF deductions done by the employer. It is a given fact that your salary may not be much at the start of your career, and as a result, your saving capacity is also limited in absolute terms. But is this a reason not to start saving? Saving even a few thousand rupees a month during the first few years of your earning life can have a huge impact going forward. The earlier you start building your savings, the better will be your return on investment. Here are a few benefits of early investing:

The compounding magic:

The most obvious and key reason to start investing early in your career is to gain from the effect of compounding. You would have learnt in school that compound interest means the interest earned on interest. All of us know that the principle of compound interest works magic on building money. But very few of us take advantage of this. When you continuously reinvest your earnings, your money grows exponentially.

Example 1 . Lets take the case of 2 individuals- X and Y. Both are 30 years old and have 30 years left for retirement. X invests for the first 15 years only, but does not withdraw the corpus after 15 years. He lets the money grow for another 15 years. On the other hand, Y invests for the entire 30 years. This is how the corpus position looks like after 30 years:

Xs investment during the initial years is more than Ys investment, and this had enabled him to get a higher corpus on retirement, compared to Y, even though both had invested the same total amount of Rs. 5.4 lakhs.

Example 2 . In this example, both X and Y start working when they are 25 years old. X starts investing early in his career, while Y starts 5 years later.

You can see the difference made in the final corpus value due to a delay of 5 years in investing, even though Xs monthly outflow is lower than Ys. If Y needs the same amount as X for his retirement (Rs. 57.42 lakhs), he will need to shell out Rs.2,519 per month instead of Rs. 2,000.

Risk-taking ability: When you start investing early, you have the opportunity to explore different investment options and also choose risky ones and experiment. However a person who starts late is more wary in his investment choice, as he knows that he does not have sufficient savings back-up.

Prudential spending habits: Investing early brings a discipline in spending habits, as you have lesser disposable cash with you. You learn to be prudent with your expenses.

Money available during emergencies: Early investment habit guarantees a cushion of savings which can be used in sudden emergencies and times of need.

Ability to accomplish financial goals: As seen in Example 1 above, you build a larger corpus when you start investing early for the same investment amount, you can opt for better lifestyles, which helps you fulfil your financial goals.

So remember, no amount is small to start saving. Pay yourself, first. Start now! Invest wisely! And build a secure future for yourself.

Team Getting You Rich