Importance of Starting Early
When you are young, you think you don’t have enough money to invest. Your initial steps into the working world also come with more expenses. Now that you finally have the money to buy that cell phone, TV or the car you always wanted, your salary or income disappears faster than you realise. Keeping some money aside for investing may feel unimportant. So you may think why not start investing a few years later when you have more money to spend and save? Unfortunately, this cycle never ends. By the time you realise the importance of investing, you may lose the advantage of time by your side.
Even a small amount can create a big value if given enough time.
Investing early can give you a big advantage. You can not only plan your investments but also give them enough time to grow into a corpus that meets your financial goals.
Power of compounding
Compounding essentially means reinvesting the profits from your investments to make your investments grow exponentially. Let us say you start with just ₹1 that keeps doubling every day for 25 days. How much do you think will be the final amount at the end of the 25th day? From ₹1 it will go to ₹2 the second day, ₹4 the third day and so on, reaching a phenomenal amount of ₹1.67 crore rupees on the 25th day!
This is the power of compounding. However, if you follow the same example for 20 days, then the amount is just ₹5.24 lakh – 96% less than what you get after 5 more days. This shows that when giving your investments the power of compounding, giving enough time for them to grow is equally important.
Benefits of compounding
So how do you take advantage of the power of compounding in your investments?
Make sure you start investing, even small amounts, as soon as you start earning for compounding to work.
Avoid any withdrawals as it reduces your invested amount, giving lower returns.
Consider an example:
Mayank and Vivek are brothers. Mayank is 25 years old and starts a Systematic Investment Plan (SIP) of ₹5,000 per month in a mutual fund, with growth option (which means returns will be reinvested for compounding to work). SIP essentially means that he does not need to have a large sum to invest in a mutual fund. He can instead break it into monthly regular parts for his investment.
Meanwhile, 30-year-old Vivek also starts the same SIP with Mayank. They both want to keep investing till they retire at 60 years. Assuming they got an average return of 9% each year when they both turn 60, Mayank’s accumulated amount would have reached ₹1.35 crore and Vivek’s amount will be ₹85.7 lakh rupees. So by starting just five years earlier, Mayank will get ₹49.9 lakh more than Vivek!
This simple example shows that if you start early, invest regularly and avoid withdrawing from this accumulating amount, your investment will grow manifold. This will enable you to create wealth and fulfil your financial goals in life like buying that dream house, funding your child’s education or your own retirement in a much easier way.
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