How to PROFIT by investing early in life

Most of you find finance and investing too complicated and irksome. But did you know that investing small amounts regularly and keeping a check on your savings and expenses can take care few of your monetary problems.

Sounds easy!

After all a good work-life balance is supplemented by effective budget management, which translates to, keeping your credit card bills in check, planning your household needs and investing wisely. In this post, we will show you how early bird catches the worm :-)

Disclaimer: This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients.

Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Why should you start early?

People always advise you to start investing from an early stage without providing you the reasons for it. We tell you the profits and the reasons of early investing in the following short story.

We consider two gentlemen, Amar and Prem. Both join the same company: ABC Ltd. as freshers when they are 25-year- old.

Amar diligently sets aside Rs 1,000 from his salary every month to invest in a mutual fund, whereas Prem feels he is still too young to worry about finances.

In the middle stages of his life Prem also starts investing the same amount in a mutual fund.

Amar and Prem, both wish to retire comfortably when they are 50. Now, considering 10% rate of return adjusted for inflation, at retirement, Amar would have Rs 11, 80,165 while Prem would end up saving only Rs 3, 81, 270.

Clearly Amar's accumulated wealth has tripled because he started investing early in life. 

You may think, even though Prem started investing later, he could compensate for the difference by increasing his investments in mutual funds with the simultaneous increase in his earnings over time. However, you need to consider: salary hikes are accompanied by an increase in responsibilities adding up your expenses.

As Prem has a family few years down the line, which he supports unlike the early years of his career when he was a bachelor.

Now considering, if at the age of 35, Prem wishes to have the same corpus as Amar, how much do you think he will he have to shell out?

To end up with an equal amount of accumulated wealth, Prem will have to contribute three times of the initial outgo! Surprising, isn't it? Therefore, we can always start investing small amounts with top-ups.

How you can start to invest early

After understanding the importance of early investing the next question in your mind is: How do I start investing? We provide you easy steps which will help you buckle up your seat belt and start investing early.

1. Set aside an amount

The daily mundane routine leaves you little time to fret over something as complicated as investing. You can fix this by preparing a simple budget in order to assess your spending.

Expenses for entertainment purpose like dining at restaurants, purchasing consumer electronics or luxury goods and miscellaneous expenditure on home renovation etc., can come under discretionary expenses. 

The basic necessities of everyday life can comprise non-discretionary outlay. Thus, budgeting will help you segregate your needs from your desires. Apart from this, you can also create a contingency fund for an unforeseen emergency which should ideally be equal to 3 to 6 months' of your salary.

After considering actual and anticipated expenses, the surplus will give you a picture of the amount of money that you can set aside for investing.

2. Set your financial goals

The second and most crucial step of being fiscal free is goal setting.  This should be done keeping in mind your major commitments like proceeds towards daughter's wedding or down-payment for a new house or car.

While setting your individual goals, you should:

• Know your goals precisely. For example, goal could be a regular stream of income after retirement
• Put a figure to it. Suppose, you are 25 years old and wish take a break from work at 40, to relax or to start something of your own. So, in order to support your lifestyle during the hiatus, you should have a corpus that can provide at least 80-90% of your income. 

Shorter the period between your current and retirement age, more monthly savings need to go into building your retirement corpus. Chart 1 here, illustrates the accumulated amount assuming return and time period. Even if the return (CAGR) is higher, ultimately you could amass huge wealth with the long-term investments due to the power of compounding.

3. Acknowledge purchasing power

There may be a fall in the value of money owing to factors like inflation, opportunity cost of money etc.

Let's say, Rs 1 crore may not be worth the value on your retirement that it garners today. In the same way, your mom could buy a month's grocery 10 years back with Rs 1,000, which is certainly not possible now!

Conclusion

Managing money is critical for realising your goals. The goals for every individual may vary from saving for an exotic vacation to supporting kid's admission in a premier league college. Starting early is one of the basic principles of investing that can definitely help you in achieving your much-desired goals.