I was about to leave office when a junior colleague came to me seeking help in financial planning. Though I was in a little hurry I couldn’t stop myself helping him with my suggestions pertaining to financial planning. I am in my mid 30’s and now sometimes I think I should have started financial planning a bit early in my life and could have accumulated a substantial wealth till now. Saving and investing money at an early age is always difficult as we have so many temptations around us viz branded clothing, electronic gadgets or freaking out with friends etc. By the time people realize the value of savings and investment they are hardly left with time for the magic of compounding to make substantial additions to their investments. Here you can read why compounding is known as the 8th Wonder of the World. Here are some simple but powerful strategies to save and start investing money at an early age and at any age
- Understand You are not Going to Work Forever: Average life expectancy in India is around 67 years and if you start working at an age of 25 years you will have 35 years to work and plan for your life post retirement. One can’t plan his retirement at an age of 45-50 and even if one plans he will surely land short of money required to maintain a similar life style post retirement.
- The Sooner the Better: The sooner one starts investing the better the returns would be as the compounding will not add but multiply the return on investment in long run.
- Start with a Small Amount: You can start with a small amount but keep increasing the investments every month or quarter by 5-10%. This way you will be able to manage your expenses efficiently and will be able to utilize the funds in a better way.
- Have a Financial Goal: Have a financial goal before starting investing. Without a goal it will be like shooting without an aim. Financial goal will help you decide the amount of money you will need to invest, type of fund and tenure of the investments.
- Diversify: As they say one should not put all eggs in one basket similarly one should not invest all his money in a single or similar kind of funds. There are various Investment Avenues wherein you can invest your money e.g. Debt funds, Equities, Mutual Funds etc. Understand the risk associated with different investment funds before making any investment.
- Education Loan: If you have taken an education loan don’t rush to pay it fast. Banks offer education loans at discounted rates and there are many investment avenues which offer higher rate of return than the rate of interest charged by banks on your education loan. The RoI will further discount your education loan.
- Insurance Planning: Insurance is amongst most important investment avenues these days as it not only insures your life against any peril but also helps you make a big corpus in long term. The cost of insurance is lesser if you buy insurance at younger stage of your life and goes on increasing as you grow older.
- High Risk Appetite: At young age people have time in hands and their risk appetite is usually high so one can invest in funds with high volatility but high returns and make good fortunes in long run. But this luxury ceases to exist as you grow old.
There are some temptations which attracts people to commit Beautiful Mistakes without worrying about their ill effects on their financial health in long term. One should avoid spending or spend carefully on the following:
- Credit cards/ Personal Loan: Credit cards offer hassle free shopping and are user friendly as you don’t have to pay in cash and offer to buy stuff even if you have a nil bank balance. This is where one need to be careful as people tend to spend more and impulsive buying usually is of no use and they end up buying products which will be of little utility. Similarly Personal loans comes with very high interest rates and people end up paying substantially very high than the actual loan. Though Credit cards and personal loans help to meet sudden expenses but after all you have to return the money to the bank and even an extra spend of one single time can severely affect your financial goals.
- Electronic Gadgets: These days buying costly gadgets has become a fashion and young people loves to buy gadgets with maximum no. of features and apps. A high resolution DSLR camera does not mean it will click better pictures as even a point and shoot camera can click good pictures if you know how to manage shutter speed, ISO, aperture and lighting etc. of the camera. A mobile with 36 Gb or more inbuilt memory or 1000s of apps is of no use if you are keeping even those songs/videos which you would have hardly listened/watched if you had phone with lesser memory. Similarly if you are not using the apps you have downloaded on your mobile, there is no point in spending money on such expensive mobile phone just for the sake of show ups. Similar is the case for computers, laptops and I-Pods etc. First understand your requirement and then only buy. If you can’t take care of your electronic gadgets or you get bored very easily then you must make it a point not buy expensive gadgets.
- Car: Car is a luxury but also a big liability. Entry segment car costs more than Rs. 3 Lacs and if you take 100% loan for 5 years you will need to pay around Rs. 6600/- per month as installments for next 60 months. Plus add another Rs. 5000/- per month as running cost of the car to it. The total cost per month would be Rs. 11,600/-, and in 5 years you would spend 6,96,000/- for owning a car, which is quite big amount for anyone with no financial back up (Assuming you purchased the car in the very first month or year of your professional life). If your company is not paying you for the car better use public transport or a bike and whatever you save per month invest that in the fund of your choice
Though there is no guaranteed path of financial stability and financial security but if you start investing at an early age, the compounding effect will surely help you to meet your financial goals in long term. I hope this post will help you understand the importance of starting investing early in life and how can we avoid Beautiful mistakes to ruin our financial health. Intelligent investment with long term aim can make all the difference.