A primary reason for that is the concept of ‘power of compounding’.
If you start investing as early as your first paycheque and do it consistently, the power of compounding will reward you multi-fold. To understand better, let's look at this graph:
This chart clearly explains how your investment amount grows over time. The more time your money spends in the market, the higher the returns, thanks to the power of compounding.
Starting your investments just five years later would reduce your possible returns by almost half, and the more you delay, your returns will become progressively lesser (almost 1/6 of your projected return if you delay your investment by 15 years.) You will either compromise on your returns or would have to increase your monthly investment amount significantly to get the same returns.
Set clear goals
Ensure your financial goals are SMART!
Here’s how to set SMART goals in financial terms:
Type of goals
Once your have your goals, segregate them as per their importance and timeline.
Budget your income
The first step towards attaining financial freedom is budgeting. The 50-25-25 rule is is a great gateway to financial planning as a novice. In this rule, you should:
You can change this rule as per your financial obligations. The idea is to invest at least 25% of your paycheque every month, anymore than that is welcome. You can tweak the spend/saving percentage based on your needs and wants.
Emergency fund
Before you start investing, ensure you save a rainy-day fund of at least 3-6 months of your salary as savings. This ensures you are covered for any small unforeseen expenses such as medical bills, minor repair work, buying appliances etc., and you don’t have to pilfer money from your investment fund for these expenses. This extra corpus can also help you realise short-term goals over time.
Identify the right plan and start investing
As a young investor, now is the right time to take some risks with your investment portfolio. Invest in mutual funds, stocks, bonds, and a robust retirement plan to diversify your portfolio and mitigate any possible risk. You can allocate your assets in equity mutual funds, especially for long-term goals.
This asset allocation formula can be used as a guide to figure out how much to invest in equities:
% invested in equities = (100 - Age of Investor)
Let us consider the age of the investor as 25, then 75% of his total projected investment fund should be allocated to equities.
A sample plan for investing in equities for a 25 y/o person who earns roughly around 75k per month can look like this:
Retirement Planning
You can plan retirement at any stage of your career, irrespective of your age. However, the sooner you start, the easier it becomes to build a considerable corpus. With limited responsibilities, your 20s are a wonderful time to set aside a small amount every month. You will live beyond your 'prime employment years', so planning for those years is imperative. The best part is you are still young, and this is possibly the best time for you to start planning for your retirement. A great pension plan will establish your freedom for your sunset years and provide several perks, such as:
The key to being a sound investor is starting early and being consistent and patient. Invest with a vision, whether it is a pension plan or buying a property —a wishful goal that may seem impossible today can become a reality with financial and retirement planning.
When investing, patience and discipline are must-have qualities. These will mitigate the risk of market volatility and reap the benefits of compounding interest. If you have an eye on the ball, achieving your goals by investing in long-term portfolios is absolutely possible.
The 'better late than never' attitude still applies when inculcating good habits —whether financial or personal.
