Importance of Early Investments

Early Investments

Many people in India don’t realize the importance of starting early investments because they have neither made any calculations on a piece of paper nor made any effort to hire a paid financial consultant who can give him a unbiased advice on his portfolio of investments. Ideally, you should understand the importance of starting early in life.

You need to understand a very important concept of compound interest to learn the importance of early investments. Compound interest arises when interest you earn on your investment is added to the principal amount, so that the accumulated interest that has been added also earns interest.

Compound interest helps you to achieve financial goals like early retirement, child marriage easily as compound interest takes its major effect in the later stages of the investment i.e after 10 years and so on.

Scenario 1

Let’s take two scenarios where in one person invested Rs 5000 per month for 20 years and assuming 155 rate of return from his mutual fund investment, he made Rs 74 Lakhs after 20 years. The other person who started off investing Rs 5000 per month, five years later and invested for 15 years (it means he invested Rs 3,00,000 less as compared to the first individual), he ended up having only 33 Lakhs after 20 years i.e in 15 years of investment period which is almost 41 Lakhs less than the first individual.

Scenario 2

Let’s take one more scenario. One person started investing Rs 10000 per month as SIP for 25 years in equity funds in 2012 and assuming a rate of return of 15%, he would be able to accumulate Rs 3.24 Crores at his retirement after 20 years in 2037.

Now he delays his investment by just 5 years and starts his investment in 2017 and further he plans to achieve his financial goals by 2037 as he planned earlier. Now he has got 15 years of investment period as against 20 years in the first case. Now even he invest Rs 20000 per month (which is double the amount invested from the first case of Rs 10000 per month), he would be able to accumulate in fact less amount of Rs 3 Crores as compared to Rs 3.23 Crores when he invested Rs 10,000 per month for 25 years.

Scenario 3

Ram invested Rs 2,000 per year in balanced mutual funds between the ages of 24 and 30; that he earned a 12 per cent after-tax return, and that he continued to earn 12 per cent per year until he retired at age 65. Shyam also invested Rs 2,000 per year, earned the same return, but waited until he was 30 to start and continued to invest Rs 2,000 per year until he retired at age 65.

You won’t imagine at the end of age of 65, both would end up having 10 Lakhs. But Ram had to invest only Rs 12,000 (i.e., Rs 2,000 for six years), while Shyam had to invest Rs 72,000 (Rs 2,000 for 36 years) or six times the amount that Ram invested, just for delaying his investment by 6 years.

The crux to Notice over Here is That

Let’s say you are assuming 18% annualized returns from your investments. It means your money would become double inside 4 years. Now thereafter in next 4 years, your investment would become 4 times in total 8 years and then thereafter would take another span of 4 years (total 12 years) for the investment to become 8 times and so on.

This quotes example clearly indicate that power of compounding takes major positive impact in the later stages of investment cycle. So you need to keep your money invested for more and more period so that power of compounding helps you to make you rich.

Conclusion – Early Investments

Start investing early, this is the advice all financial planners suggest today. But, why need to start investing when you are young. This is because of the compounding power of money.
Absolutely there is a difference who starts investing at the age of 18 and who start investing at 28. If you start investing at 18, you will get financial freedom soon and get retired young with adequate wealth.

The more years you can compound interest on your investment the faster your investment will accumulate and the better off you will be when you retire and start enjoying your savings.

Investments should be made in life as soon as we are financially able. The amount could increase over time, depending on our capability to invest and our long-term needs. So early investments in your career will help you in building a secure future.

About the Author

Vaibhav Sangli is an MBA Finance who loves to write on several topics including insurance and mutual funds and finding out different ways to earn and spend money.

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