In the relentless march of time, the adage “Time and tide wait for no man” underscores the significance of utilizing time wisely. The power of compounding, particularly in the realm of financial planning, emerges as a unique force capable of shaping success. This article delves into the compelling reasons and strategies for investing in your 20s, unraveling the potential for substantial returns and financial security.
As we always here Time and tide waits for no man making us realizes how important and crucial the “time” is and utilizing it properly can definitely help us in achieving success in all walks of life and time in the era of financial planning as a unique power of compounding.
Assuming Mr. X is 21 years old in the year 2000 and invested Rs 5000 in 10 grams of gold, he would have received an almost 12 times returns on his investment after 23 years, as the value of 10 grams of gold has climbed to approximately 60,000.
Let’s take another example to understand the compounding effect, Let’s say he begin investing Rs. 2000 per month in asset which gives an annual interest rate of 12%. At the age of 25, his initial investment of Rs. 6,00,000 will have grown to an amazing Rs. 37,95,000.
When we begin investing at a young age, we unlock the power of compound interest. Compound interest means when we earn interest on our interest income
in addition to our principal amount. And therefore, starting in 20s is the best advise one can possibly listen. The twenties are the time when we start understanding the importance of saving, investment, and returns. This is the age when we start to have financial freedom, and then slowly start taking responsibility for our own life.
Benefits of Starting Early:
Beside the magic of compounding there are several other benefits if we start investing at an early age
1. Achieving Our Financial Goal at An Early Age:
If we start investing at an early age it will benefit us to achieve our financial goals more quickly. Whether it would be buying a house, buying a dream car, planning for world tour, or retiring at an early age, starting at an early age gives us sufficient time and resources to achieve our goal
2. Gaining Knowledge and Experience:
If we start investing at an early age we get a lot of knowledge and experience and if we get fail if any of the investment, then we have the time to learn from our mistake and make improvements
3. Increasing Risk-Taking Ability:
Investing from a young age also enhances our ability to take chances. Early risk-taking is very easy because there are no family responsibilities to worry about, and if we make any mistake, we have time to fix it.
4. Improve Money Management Skills:
Putting money aside in 20’s encourages us to practice financial discipline, which will come in useful later on when our income and spending both rise. Financial discipline also helps us in managing our spending.
5. To Retire Earlier with Bigger Retirement Corpus:
Our retirement corpus should be large enough to cover our regular household expenses along with the medical expenses that usually come with old age. So, if we are planning to retire at the age of 60, and expecting a life expectancy of 80, our corpus should be able to cover our expenses for at least these 20 years. So, for creating such a bigger fund we must start investing earlier.
How to Start Investment?
We should always use the rule 50:30:20 to determine our investment amount. Our income should be divided into three parts. 50% of income should be spent on necessities, 30% on desires, and 20% on savings and investments.
Example:
If we earn Rs. 100 per month, we will put Rs. 50 towards our “needs.” It could be our rent, bills, or daily necessities. Additionally, Rs. 30 of our income will be allocated to our wants or desires, and finally, Rs. 20 of our final sums will be apportioned towards our savings or our investments.
Where Can Young Investors Invest?
We have two major investment options: Equity and Debt.
Now comes to the question whether we should invest in Equity or Debt.
There is a simple principle rule that states that a hundred minus our age should be our percentage investment in equity. So, for example Mr. A is 21, so his Equity investment should be 100-21, which means that 79% of his investment should be invested in Equity because Equity is always beneficial for the long-term period and the residual 21% should be invested in Debt. And we should always have a diversification in our portfolio and a proper balance between our risk and return.
Conclusion:
Starting Investing at 20’s is always beneficial and we have an opportunity to earn a lot and take experiences as it is an ideal time to set up best practices regarding the investing habits. With time on our side, young people can take advantage of compound interest by investing in tax-advantaged as time is a very valuable asset. We will have more time to enjoy our plans if we set goals and begin working toward them sooner.
So lastly, “Invest in 20’s and enjoy in 60’s”.
We are open for comments and suggestions. The above article has been prepared as by Ms. Shruthi Nyavanandi (Shruthi.Nyavanandi@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in)