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Now that I am earning I can finally spend! Why should I care about investing at this point

So, you finally have a job. You no longer need to ask your family for pocket money. Remember those moments when you wanted to buy that expensive tablet or go to a fancy lounge bar, but didn’t know how to ask your parents for the money? How would you justify why you needed the cash? And really, you didn’t need it. You just wanted it.  But ‘wanted’ was not good enough. You never heard the end of it if even if your parents indulged your request.

Now, you have a job. You have discretionary income.  It’s liberating, exhilarating. Finally, you’ve arrived! It’s that beautiful phase, where you are wondering how to spend your earnings. An EMI plan on a car might be nice, that new smart phone or those beautiful shoes…

But hold on before you get too far…let’s give your new found financial freedom some thought. Let’s account for:

  1. These carefree days may not last more than a few years
  2. You’ll soon start married life, and have a spouse to think of
  3. Then, child number one
  4. Maybe child number two
  5. You get older – your earnings increase as do your expenses. A house, a car, school fees…
  6. Your parents’ get older - you may need to help them financially.
  7. How will you fund your children’s college education, marriage?
  8. You will retire - how will you maintain your life style?

And now, let’s rewind back to today. Where were we? Yes, you were a carefree and young individual. But after reading this article, you will be carefree, young and wise individual. 

So, read the list below carefully for information that will stand you in good stead as the years roll on.

There’s no rule that says you can’t spend when you have the disposable income. But the wise one squirrels away a small percentage of his/her salary without fail every single month.  Is that 10%, 15% or 20%, you decide. 

That leads us to the next important question - should you just kept that money aside, as in “save” or should you “invest” that money? See the table below to get your answer:

 

Saving

Investing

Goals

Good for short term goals – you can let your money lying in a bank (savings or fixed deposit) account

Good for medium to long term goals. Think of your bigger goals and then a strategy on how to achieve them. How would you plan for your child’s education or to buy a house?

Liquidity

You can retrieve your funds relatively easily

You may have to choose from various investment options available if liquidity concerns you

Risk

Risk is limited

Risk ranges from low to medium and high, as well. Based on your risk appetite, you could decide from the various investment options

Earnings

You will earn interest income but in all probability it may be lower that the rate of inflation, which means you are actually losing out

You have the potential to earn more than the rate of inflation. The higher the risk the high the potential for returns.

 

So, clearly, if you want to beat inflation and have serious financial goals, investments are, in all likelihood, the way to go.

But if that’s not got you moving to start investing yet, here’s the most important of all, the big secret…, the key reason to start investing ‘NOW’…imagine some suspenseful music here…the magic of compounding. See the following example to know why compounding is so powerful:

Age when you start to invest

25 years

40 years

You invest for

11 years

21 years

You invest per month

Rs. 5,000

Rs. 15,000

Number of investments you make

132 installments

252 installments

Total invested amount

6.60 lacs

37.80 lacs

Assumed annual return

15%

15%

Value of investment when you are 60 years old

4.81 crores

2.14 crores

You can decide to wait with investing until you are somewhat older and have more money to invest.

Let’s say you want to wait until you are 40 because you think you will be able to invest maybe three times as much as now on a monthly basis. That way you can enjoy spending all your income now and still have a decent amount saved up by the time you reach 60 for, say, your retirement needs.

“It doesn’t make that much difference whether to start now with a small amount or wait and invest a larger amount.” That’s what you think… Let’s look at what the above example shows.

If you start now, even with a smaller amount, and you invest in total 6.60 lacs over a period of 11 years you will have almost 4.81 crores available by the time you are 60!

If you would have waited and started at 40, and even though you would have invested more on a monthly basis, totaling up to 37.80 lacs, the amount available at 60 is only 2.14 crores.

That is almost a whopping 2.67 crores difference! Imagine what you can do with that additional 2.67 crores..!

Therefore, investing regularly even if it is a smaller amount can do wonders, if you “start early”.

As the mystic Sufi saint, Kabir said in his famous couplet:

Kal kare so aaj kar,
aaj kare so ab
Pal mein parlai hoyegi,
bahuri karega kab

Do tomorrow’s work today
Do today's work now
If the moment is lost

How will the work get done?

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