When it comes to investing, time is your biggest ally and investing early is a smart financial decision. The earlier you start investing, the more time your money has to grow and compound.
The day one gets the first income is the age when one must start investing. This income need not be only from a job or profession or business. Even you can consider the pocket money that kids get is an income. These days, many college students get some stipend for the work they do for companies or they may be paid for some projects or assignments. Students may also earn cash prizes in various competitive sports, or other competitions like debates, essay competition, science projects, among others.
To get benefit of compounding Compounding is one of the most powerful tools when it comes to investing. The concept of compounding is simple - it is the process of earning interest on your interest income. When you invest, you earn interest on your initial investment as well as on the interest that your investment generates. This means that your money grows at an exponential rate over the period of time. The longer your money is invested, the greater the potential for compounding to work
Let us understand the magic of compounding with the help of an example.
The example above shows how an initial investment of Rs. 1,000 grows to Rs.31,409 over a period of 40 years. When the interest earned is reinvested, you earn interest on the previously earned interest and so on. Whereas in case of simple interest, the principle amount remains at Rs.1000 only for all the 40 years and with annual interest of Rs.90, the amount grows to Rs.4600 (1,000 + 40*90).
Risk Tolerance When you invest early, you have the advantage of being able to take more risk. This is because you have a longer time horizon and can afford to endure short-term market volatility. By taking more risk, you have the potential to earn higher returns, which can help you reach your financial goals earlier. Investing early also gives you more time to diversify your investment portfolio. Diversification is the process of spreading your investments across different asset classes. This helps to reduce risk and can help you achieve more consistent returns over the long-term.
Help you to grow your retirement saving Investing early is particularly important when it comes to saving for retirement. By starting early, you can take advantage of the power of compounding to grow your retirement savings over the period of time. This means you can build a larger portfolio and have more financial security in your retirement years
Inflation Inflation is the enemy of saving, but it is the friend of investing. Investing early can help you stay ahead of inflation and protect the purchasing power of your money. Over the long-term, investments have historically provided returns that have outpaced inflation.
The popular saying “an early bird gets the worm” is truly applicable in investing.