Financial management is the last thing we think of when we are young.
We have a huge bucket list to aspire to! We want to secure that dream job, go on vacations, and generally live a good lifestyle.
With an increase in disposable income over the years and the rise of the gig economy, it is natural that young people just want to earn money and spend it. That is their mindset.
Investment is the last thing to figure out in their scheme of things. But once years begin to pass by, people realize that they haven’t created any wealth. Expenses increase manifold with the additional responsibility of family and children. And then we go like, ‘oops I wished I had done better financial management when I was younger.’
It is never too late to start investing but investing earlier gives you many advantages.
Many studies and surveys show that early investment leads to better financial success.
Financial investment is a skill. An early start ensures that you learn the ropes sooner than later. You have plenty of time to familiarize yourself with multiple investment options, and figure out what works the best for you.
One must cultivate a mindset of financial independence from early on. There is less pressure on you to financially support others while you are young. You have a higher level of autonomy over your income. So it’s easier for you to start investing small amounts over some time.
Investing earlier has multiple advantages for financial success, growth, and a better quality of life in old age.
Reasons for investing early
- Higher risk-taking ability
You have a higher ability to take risks when you are young.
Older people would generally opt for safer investment options like fixed deposits since the risk involved is low. But you got to take some risks for wealth creation. Young investors are more experimental and courageous in their approach.
Young investors can begin to invest in equities and stocks. Time is on your side so even if you make some mistakes, it’s alright. You can start by investing in smaller amounts.
It is better to start as early as you can. Your financial commitments will increase with time which will decrease your risk-taking appetite. So start investing earlier so that you have more opportunities for wealth creation.
- You get the advantages of compounding
Investing earlier helps you tap into the gain from compound interest. Since you start early, you keep on earning interest on interest.
Compounding is the process in which your earnings from an investment are continuously reinvested to generate additional earnings. In other words, compound interest offers you interest on the earned interest. Thus, it becomes a continuous cycle of investment that increases your chances of getting a higher return.
You need time by your side to tap into the maximum benefits of compounding. So it is recommended to start investing as early as you can.
- Increased recovery time
No matter how well-informed you are, investment is always a bit of a risk. The skill of investing involves probability. There are no guaranteed returns. So by starting early, you give yourself ample time to recover from any potential losses.
Investment is a continuous process. You have to gradually build an appetite for it. Incurring losses later in life might scare you off investing forever. So it’s best to start early.
- Your saving skills improve
You save more money by starting to invest early. The logic is simple. Since you are making regular investments, you have less money on hand to spend.
This saves you from the vicious circle of useless spending that can be a disaster for your financial success and growth.
It changes your entire thought process. Now that you are learning more about investment and have to save money every month, your spending patterns automatically change. You start sticking to a monthly budget and think twice before spending money on things and activities you don’t need.
- Wealth creation gets maximized
By investing early, you get massive benefits of compounding which helps you create more wealth in the long run.
Time is a valuable asset when it comes to investing. The earlier you start, the more options you have in terms of trying out various investment plans.
You also get better with time.
As you develop a habit of investing, you develop better financial skills. This is great for long-term financial success.
- Tax benefits
By investing early, you can avail yourself of many tax benefits. Many investment options provide tax benefits. While tax benefits should never be your sole criteria for selecting an investment plan, it’s worthwhile to research and make a list of plans which offer that.
Many investment options provide the dual benefit of tax exemption and wealth creation.
Again, investing earlier gives you ample time to test the waters and get better acquainted with these plans.
Starting to invest in these tax-saving schemes may seem difficult initially, but you can begin by investing in small amounts, and let it grow with time.
- Secure future
You never know what the future holds for you. Emergency circumstances arise when you need funds urgently. Early investments help you build a corpus of wealth that you can fall back on during such times.
If you start investing in your 20s, you would be in a much better place financially by the time your kids grow up. Paying for their higher education would no longer burn a hole in your pocket. Contrast this with someone who starts investing in their 40s.
It would take them another 15-20 years to build the kind of finances you would have already created by the time you hit 40.
Securing your future also involves saving for your retirement. Investing early would give you the freedom to opt for early retirement if you like. Planning for life after retirement would become much easier and hassle-free.
- Improved quality of life
Investing early will vastly improve your quality of life.
Your finances will no longer be a mess. The habit of investing regularly will lead to better financial management in your personal life. You won’t have to deal with challenging situations that arise due to over-spending. Your finances would be well planned, and you would enjoy a better lifestyle.
Investing early is great for retirement
Retirement is the time of your life when you want to make time for all those things you couldn’t pursue while you were busy working.
Being retired doesn’t amount to a passive life. It means being active, happy, fulfilled, and not having to deal with the stress of earning a livelihood.
When we are in our 20s and 30s, retirement seems too far-fetched. We rarely think of investment from the perspective of financial security in old age.
When we hit our 40s and feel a bit worn out by the stressful demands of work and life, reality begins to sink in.
Investing early for retirement gives you an edge because you are young, curious, enthusiastic, and tech-savvy.
You have the time and energy to research different investment options and evaluate the pros and cons. You don’t have the same energy and motivation when you cross 40.
Planning for retirement is crucial. With more wealth at your disposal, the golden years of your life can be the best. You can go for vacations, pick new hobbies, learn a new language, and further your education.
Retirement is a crucial phase of your life. It is a new way of life that comes with its own baggage. There is the psychological aspect of retiring from work life which leads to stress.
Lack of financial stability can worsen this stress. So it is important to keep the bigger picture in mind while planning your life ahead.
Tips for investing early
Investing early is great. But you got to have the right information, and figure out what works best for you. You can maximize wealth creation by making the right investment decisions.
Here are a few tips for investing early:
- Create an investment plan
Start with a plan. Assess your finances, and create a list of your goals. And then chalk out the practical steps to reach that goal. You could take the services of a financial professional or do it yourself using online tools.
Having an investment plan is crucial. It keeps you focused on your needs and priorities. It is easy for amateur investors to get swayed and make wrong decisions. A plan will save you from that.
- Stick with your plan
The value of your investment will undergo fluctuations. It’s a natural process. You might get all worked up and feel tempted to abandon your plan if you suffer losses. That is human nature. But you must have faith in your investment plan and stick to it.
Investment is all about reaping the benefits of the good times and coping with the bad times. You got to stick with your long-term investment options to make room for growth.
If you can’t cope with the regular fluctuations of your portfolio, then you must opt for a less volatile mix of investment options when you plan.
- Risk assessment is important
You have to figure out your capacity to tolerate risks.
Many young investors jump into risky investment ventures enthusiastically and then regret it later. You got to carry out a foolproof assessment of your financial position, liabilities, commitments, expenses, and mindset.
If your entire family depends on your monthly income, then it’s probably not a good idea to go for extremely risky investment options.
Risk assessment is crucial for investing early. The earlier you figure out your priorities, the easier it is for you to focus on your goals and maximize wealth creation.
- Diversify your portfolio
By diversifying your investment portfolio, you lower the level of risk. It is akin to following the middle path. The risk factor is not that extreme and there is an opportunity for wealth creation over time.
As an early investor, diversify your portfolio among bonds, stocks, and cash. Also, aim for diversification within sectors and investment styles.
Investment is a skill. So it is important to do as much research as you can about multiple investment options, and the associated risks and benefits.
Finally, it always helps to consult a financial professional who is well versed in these matters and can help you make an informed choice.
- Work on your financial literacy
You need to work on your financial literacy before you start investing. Read up as much as you can. Get relevant information and insight from online articles, blogs, books, and videos.
Don’t be hesitant to take the services of a certified advisor.
Life-long investment is an exciting venture and a strong commitment. You got to have the basics at your fingertips before taking the plunge. Investment experts are there to help you out but only you know what works best for you.
Bottom line
Investing can be a daunting exercise, especially for beginners. When you are in your 20s, you might be intimidated by the idea.
You are young, happy, earning decently, and having a good time.
You hate the idea of locking your money away. But one must realize that sacrificing short-term pleasures is important for long-term happiness and financial well-being.
Most of us think that we just got to work harder and harder to get rich. But perhaps we need to work smarter. Investment is a smart way to financial success. And it’s better to learn the tricks and techniques while you have time by your side.
Finally, it’s important to be focused and pragmatic as you start investing. Never base your investment decisions on feelings of momentary passion or excitement.
Always weigh the pros and cons before taking the plunge. Treat your investment goals as seriously as your life goals, and you’ll definitely ace it.
