Nowadays as students we receive lots of advice. It’s more or less the same. Study well, get a good job, and save money for the future; but it’s important to not just save, but to invest also. Saving money won’t make you rich, but it will be there when you need it. Savings are when you put your money in savings accounts, money market accounts, savings bonds, etc. Investing involves more risk, but if you make good investment decisions, your investments will yield higher returns over time than savings. Investing is when you put your money in stocks, mutual funds, bonds, etc.
Reasons to invest early:
- Time allows you to make mistakes
When you’re young, you can invest in risky options as you will have more time to recover if things go wrong. The later you start investing, the more cautious you will be.
2. Compound Interest
Essentially, compound interest is the interest earned on interest. By continuously reinvesting your earnings, you are exponentially increasing your return on investment. Let’s take the following example to understand the power of compounding:
- Starts working at 23
- Starts saving at 25 and invests Rs. 50,000 every year
- Assuming that on this he earns a return of 10% every year, at the end of ten years, i.e. by the time Ram turns 35, he would accumulate Rs 8.77 lakh.
- Lets the Rs 8.77 lakh grow for next 25 years and assuming that it continues to earn a return of 10% p.a., he would be able to accumulate around Rs 95 lakh by the time he turns 60.
- Starts working at 23
- Starts investing at 35 and invests Rs. 50,000 every year
- Assuming he earns a return of 10% every year, at the end of 25 years, Shyam would have managed to accumulate Rs 54.10 lakh by the time he turns 60
By investing 10 years earlier in his life, Ram accumulated Rs. 40.9 lakh more than Shyam.
3. A step ahead of everyone else
The early bird gets the worm is an idiom worth adhering to. The earlier you begin investing, the better your personal financial situation will be down the line. Compared to your counterparts, who may have chosen to invest later in life, over time you will be able to afford things that others can’t.
4. You will know how to spend wisely
Investing early allows you to develop disciplined spending habits by focusing on your budget and cutting expenses when needed. The goal here is to earn money by saving money.