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Why it makes sense to start investing early!

Last updated on: December 27, 2012 16:19 IST

Why it makes sense to start investing early!

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Investing for your retirement may not be the most important thing on your mind when you start your career.

For most people, investing may not even be on the priority list when they start their career.

When you start your career, your saving capacity may not be much in absolute terms, as your salary itself may not be much.

But this should not deter you from making investments.

This is because the first few years of your earning life has a huge impact on your future finances.

As with anything else in life, investing also benefits with an early start.

The earlier you do your retirement planning, the greater will be your return on investment.

There are more reasons than one for you to start investing early in your career.

Let's look at the various benefits of early investing.

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Why it makes sense to start investing early!

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The Effect of Compounding:

The most important reason for you to start investing early in your career is to get the benefit of compounding.

Compound interest works magic for any investor.

As you know, compound interest means the interest earned on interest.

If you continuously reinvest your earnings, your return on investment will increase exponentially.

When you regularly invest from the start of your career, you are increasing the return you receive on your returns.

A monthly investment of as low as Rs.1,000 or Rs.2,000 will have a large impact on your financial position.

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Why it makes sense to start investing early!

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Let's understand the effect with a few examples:

Example 1: X is 25 years old and has 35 years left for retirement.

He starts to invest Rs. 1000 per month for 35 years at a return of 12% per annum.

The corpus left with X at the end of 35 years will be Rs 64 lakhs (Rs 6.4 million).

Y is 30 years old and has only 30 years left for retirement.

He also starts to invest Rs 1,000 per month.

But as he has started investing late in his career, he can invest this amount only for the next 30 years at 12 per cent per annum.

The corpus left with Y at the end of 30 years will be Rs 35 lakhs (Rs 3.5 million).

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This is the difference 5 years of investment has made to the final corpus value.

If Y needs the same Rs 64 lakhs (Rs 6.4 million) for his retirement, he will need to shell out Rs 1830 per month instead of Rs 1000.

To understand the wonder of compounding, let's look at another example:

Example 2: Both X and Y are 30 years of age and have 30 years left for retirement.

Now, X invests Rs 2000 every month for the first 15 years at a return of 12% per annum.

He totally invests Rs 360,000.

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At the end of 15 years of his investment, he does not invest further and also does not withdraw the money.

His total corpus at the end of 30 years will be close to Rs 55 lakhs (Rs 5.5 million).

Now Y invests only Rs 1000 per month at a return of 12% per annum.

But he invests for 30 years.

Y's total investment is also Rs 360,000 -- same as X's total investment.

But his corpus after 30 years is only Rs 35 lakhs.

Thus for the same total investment, X's corpus is much higher than Y's corpus.

This is because X had invested more in the initial years and had allowed this money to get compounded for the total period.

Thus, the most important advantage of beginning to invest early in your career is to realise the full benefits of compounding.

There are other reasons why it makes sense to start investing early in your career --

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Improvement in spending habits: As you begin to save early in your career to start investing, you have lesser disposable cash with you.

This helps you in being more prudent and brings about a discipline in your spending habits.

Ability to take risk: Not all of us get our investment options correct the first time.

When you begin exploring investment avenues early in your life, you have a greater ability to take risk and experiment, compared to someone who starts investing later.

This is because, at a later stage in life, if you realise you do not have sufficient savings; you will be more cautious in your choice of investments.

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Money available during emergencies: When you begin to invest early, you would have a comfortable cushion backing you up.
Thus, you can be rest assured that your savings will be of use to you in times of need.

Better choices in life: As seen in the examples above, the corpus built by investing early in life is much bigger than the corpus built by someone who starts a little later.

As a result of the savings back-up, you can afford a better lifestyle and an improved quality of life, helping to fulfil your financial goals.

Thus, beginning to invest early in your career can help you in building a secure future.

 



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