The power of compounding works like magic if you are invested for a longer time.
At an early stage of life, individuals tend to have a higher risk appetite so even in case they lose their money they can earn it back and won’t affect their lives, as much as a middle-aged individual or retiree may get affected. When individuals embark on their working journey, they tend to splurge more towards fulfilling their desires of buying a new cell phone, car, or bike. During the initial years of their working life, the earning is less, which makes one believe that they have their whole life in front of them to invest and in this process, they often tend to procrastinate investing for later stages of life. However, the real benefit of investing is to start early. Even a small amount can work for you to achieve your required corpus due to the power of compounding. Compounding means interest-on-interest. In this case, interest is reinvested rather than paying it off, which helps your investment to grow at a faster pace. The power of compounding works like magic if you are invested for a longer time.
Benefits of early investing:
Safeguarding the future: Life is all about ups and downs. Every individual faces an emergency at some point in time, which can cause financial as well as mental stress. At such times, individuals can use their investment, which they had invested earlier as this won’t cause any financial tension.
Risk capacity: Young individuals have higher risk capacity as compared to those individuals, who are in mature stages of their life or nearing retirement. Young investors can bear losses as they have more time to recover those losses whereas, investors, who are nearing retirement or at a mature stage cannot bear losses as they don’t have time to recover the same. Investors with higher risk capacity can invest in high-risk instruments to receive optimum returns.
Retirement planning: One of the biggest pitfalls for retirement planning is starting investment late. When people start working, they think that retirement is too far and why should they invest in it now. This mentality makes people commit mistakes; hence, to achieve the expected retirement corpus, one should invest right from the time they start earning as this won’t create a burden in later stages of life.
Let’s look at an example:
Anjali begins her working life journey at the age of 21. She earns Rs 18,000 every month. She is well informed about the fact of early investing; so, she starts investing Rs 3,000 every month at the rate of 10% till her retirement. On the contrary, Rajeshwari, who also started her working career at the age of 21 and earns the same amount as Anjali every month, started investing Rs 3,000 every month from the age of 31 at the rate of 10% as she wasn’t aware of early investing benefits. Then, what will be the retirement corpus of both Anjali and Rajeshwari at the age of 60?
As we can see from the above calculation, 10 years can make a huge difference of Rs 1.11 crore. Anjali was able to make a great corpus because of early investing while Rajeshwari could not meet the same corpus amount as Anjali due to late investing.
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