These days it's not unusual for fresh graduates to start their careers with hefty salaries. And — something that might come as a surprise to some — not all young professionals squander away all their hard-earned money on frivolous things. That doesn't mean they don't make the most of their newly-acquired financial independence in terms of having some fun, but they're also conscious about how to differentiate between their 'needs' and 'wants'.
In fact, according to BankBazaar's Aspiration Index 2019, a majority of early jobbers polled between the ages of 24 and 27 say they save on an average 40% of their monthly income.
Many early jobbers are also quick to realise that their savings are put to good use when they invest it intelligently-not just to save on their income tax outgo but also to meet their long term financial goals in a timely manner.
Yes, many financially disciplined youngsters are good at saving money helped by the fact that they have fewer financial commitments when young. However, their financial commitments increase with age, and, in a few years, they also need to plan for buying their first car and home, arranging for their kids' education, etc. And it's moments like these when they realise the value of their savings habits and early investing.
And that's not all. There are several other reasons why starting one's investment journey early reaps rich dividends. Read on as we discuss why these young savings pros shouldn't delay their investment plans.
Avoid unnecessary spending
It's always easier to spend than to save or invest. Many early jobbers may be drawn towards a flashy lifestyle with money in their hand. However, by investing the money from the start of their career, they can easily avoid unnecessary spending.
Let's understand this better with the help of an example: "Sanjana" started her career with a Rs 50,000 per month salary. She immediately started a Systematic Investment Plan of Rs 10,000 per month in a tax-saving Equity Linked Savings Scheme, and a recurring deposit of Rs 5,000 per month. She spends Rs. 30,000 on house rent, daily expenses, etc., and saves the remaining Rs.5,000 in a high-interest savings account to build her emergency fund. This way, Sanjana smartly invested her income, reduced her tax liability and also created a contingency fund, thus setting clear financial priorities, avoiding frivolous spends, and drained her precious savings while tackling a financial emergency.
So, you're on track meeting your savings and investments targets every month, but then comes your birthday month or the discounts season, and you're unable to allocate money to your savings for that month. And soon, that becomes a trend and your savings start depleting. Sounds relatable?
But if you stay invested, especially in periodic instruments like SIPs and RDs, you'll always prioritise meeting your monthly investment goals despite those periods when you feel like spending more. As such, regular investments instill financial discipline and also help to build an adequate savings fund which can be used for occasional overspends.
More time to compound the return on investment
The earlier you start investing, the more time you allow your investments to grow with the magic of compounding. Let's understand this with the help of another example. In Case-I, suppose you started investing Rs. 5,000 in mutual fund equity scheme in SIP mode at the age of 35 years for 20 years. And in Case II, you started investing Rs. 2,000 in a mutual fund equity scheme in SIP mode at the age of 25 years for 30 years. Assuming the ROI of 14% PA, in Case I, you'll invest a total Rs. 12 lakh and get a corpus of about Rs. 65.82 lakh. In Case II, you'll invest a total of Rs. 7.2 lakh but get a higher corpus of a whopping Rs. 1.11 crore. That's the power of compounding when you invest for the long term!
Retire early or get a bigger retirement corpus
For retirement, you may dream of a big corpus so that you can live a lavish life in your golden years. You can get a significant retirement corpus either by investing early or by investing a big amount. Early investment is always a more comfortable and safer option than investing bigger amount later in the career.
Also, if you want to retire early, you can do it by investing early and accumulating adequate corpus. If you start investing late, it will get difficult to accumulate a sufficient corpus for early retirement.
Live debt free
Often people require the support of borrowed fund not just to achieve their big-ticket financial goals (such as buying a home and to raise funds for their children's higher education) but even for their short-term goals or during an emergency. However, if you invest early, you can build a corpus for your short and long-term goals and also secure an adequate emergency fund; therefore, you may not need to borrow for those goals. So, early investments can minimize your reliance on borrowed funds and save you a fortune on interest payments.
Early investment, along with financial discipline, can help an investor build wealth in the long term and maintain a good lifestyle. You'll also be well-advised not to wait for a higher salary or increment to start investing, but to start your investment journey with a smaller sum and gradually increase your investment size as you move up your career ladder. Wish you all the very best!
(The author is CEO, BankBazaar.com)