When you are just out of college and into your first job, savings and investments are the last things on your mind. It's usually the latest gizmos or a sale at the neighbourhood mall or the latest movies or the hottest motorbike/mobile/car that captures the attention. And you can't really blame anyone for that.
When you only have these objects of desire being advertised in the media, who has time for boring tasks like savings and investments. For that matter if you are busy spending on these objects of desire, who has any money left for savings and investment?
Even when savings and investments do get a share of the youth's attention, it usually has a tax-saving angle. Thank god for taxes, without it most of us would not have invested at all! To be sure, there are plenty of reasons to save and invest and tax-saving is probably last in our list of reasons.
Surplus
No matter how spendthrift most of us are with our money, we would have to be really reckless to end up with zero savings. And if you do manage to save after being spendthrift, you need to put that money away somewhere so that it helps you meet your future needs and aspirations. That's where investing comes in the picture.
Investing not only helps you keep your money at arms length from you, it also helps it grow. And if you have invested wisely, it can grow to something significant. Investing is a conscious decision to set money aside for a long enough period in an avenue that suits your risk profile.
Such avenues could include equities, mutual funds, fixed deposit, real estate and bonds. If you only learnt about the fruits of investing, we are willing to wager a bet many youths would willingly sacrifice their dreams of buying the fanciest gizmos at the alter of this very unexciting activity.
Wealth accumulation
Most of us no matter how affluent, come across several stages in our lives when we need a large sum of money. This could be while buying a house or a car, marriage, education and most importantly retirement. Arranging for a large sum of money at a short notice can be quite demanding, and often, impossible.
However, if you were aware of the milestone and started preparing yourself (financially that is) to provide for it, it could get a lot simpler.
Investing helps you achieve that. By setting aside money regularly over a period of time, you can accumulate wealth to meet your financial commitments. For that to happen, you must be disciplined enough not to dip into your investments to buy the latest mobile or for that matter not get carried away and invest in the hottest investment tip of the day.
Of course, just investing money consistently is not good enough; you still have to make the right investment decisions.
Inflation
Investing has an important role to play in protecting the value of your money. Most of us are so busy with our work that we realise only later that the money we have can no longer buy what it used to. It's because things have got 'too expensive'.
This phenomenon can be explained in just one word - inflation. Inflation is like a silent assassin that damages without even letting people know it was there. To go one up on inflation, you need to make your money grow fast enough so that it can still buy what it used to and more. For that you need to invest money regularly over the long term.
Put simply, if inflation is eating into the value of your money at 5 per cent per annum, you need to invest your money in an investment that will give you a return of over 5 per cent p.a. to preserve the purchasing power of your money. Of course, this may sound a little complicated now, but your financial advisor should be able to help you with an investment plan that can counter inflation effectively.
Tax-saving
By far, tax-saving is the most compelling reason for most investors to set aside money for the long term. In our view, tax benefits should be the last reason why you need to save and invest. Think about it, why should you need a tax sweetener from the government to save and invest your own money? What if the government was to withdraw or dilute some of these tax breaks, does that mean you stop investing altogether or dilute your investing activity?
As things stand today, investing can reap some great tax benefits (more on that in another article), but we would advise investors to invest regardless of the tax benefits and look at the other three reasons we have highlighted.
Benefits of an early start
How many times have you heard this - you are young and have time on your side? While you may have heard this in context of something totally different, the good news is that having time on your side is a big plus even with investing. In fact with time, your investments could assume some gigantic proportions. For that to happen, you need only to be patient and disciplined.
We have a small illustration to underline the importance of an early start; that is what we mean by 'having time on your side'. As investors who are young, into their first jobs, with minimal domestic commitments, you have both time and money on your side.
The early bird offer
|
Amar |
Akbar |
Anthony | |
|
Amount invested (Rs per annum) |
10,000 |
10,000 |
10,000 |
|
Tenure of investment (years) |
25 |
20 |
15 |
|
Returns (% per annum) |
10 |
10 |
10 |
|
Maturity amount (Rs) |
457,620 |
144,870 |
144,870 |
|
Maturuty amount (Rs) |
983,471 |
572,750 |
317,725 |
|
% of Amar's investment |
100% |
58% |
32% |
|
Commenced investing after Amar's (years) |
0 |
5 |
10 |
In our illustration, you have three friends - Amar, Akbar and Anthony. Amar is the savings-conscious youth who has heard from his father about the benefits of saving and investing. He embarks on an investment plan of 25 years; every year he plans to invest Rs 10,000.
Akbar is a little spendthrift with his money. At the end of the month, he does not have a lot of savings to show for. However, he turned a new leaf in Amar's company and embarked on an investment plan similar to that of his friend. This he did a good five years after Amar had initiated his own investment plan.
Anthony is the most 'careless' of the trio when it comes to saving. He believes in living in the present. He did however, initiate an investment plan; only thing it took him 10 years from the time Amar started, to appreciate the virtues of investing.
It's apparent from the numbers who will have the last laugh. Amar for sure will be most pleased with his investment plan. Akbar will be a little confused and is likely to have some questions the most important of which is why just a 5-yr head start by Amar has led him to accumulate 70 per cent more wealth than him.
Anthony of course, has paid the price for waking up to the benefits of investing too late in the day. Just a 5-yr delay has seen him accumulate only about 55 per cent of Akbar's wealth. A 10-yr delay has seen him manage only about 32 per cent of Amar's wealth.
So where did Akbar and Anthony go wrong? It's the timing or rather the lack of it. To reiterate a point we made at the beginning of the illustration - it pays to have time on your side while investing, since the power of compounding is really apparent over long periods of time.
If two individuals invest consistently over a period of time, the one who started investing earlier will make more money. In our illustration, a 'small' 5-yr difference in their investment tenures has resulted in Amar, the earliest bird, garner 70 per cent more wealth than Akbar.
So while investing is concerned it makes more sense than most people realise to get in the race as soon as possible. In this context, begin investing at the first hint of any savings. If you don't have any savings then create some. But at any cost, do not delay implementing that investment plan because your time already started yesterday.
By Personalfn.com, a financial planning initiative
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