Mar 20, 2013, 12.40 PM IST
Investing for your retirement may not be the most important thing on your mind when you start your career. For most people, investing may not even be on the priority list when they start their career.
Investing for your retirement may not be the most important thing on your mind when you start your career. For most people, investing may not even be on the priority list when they start their career. When you start your career, your saving capacity may not be much in absolute terms, as your salary itself may not be much. But this should not deter you from making investments. This is because the first few years of your earning life has a huge impact on your future finances.
As with anything else in life, investing also benefits with an early start. The earlier you do your retirement planning, the greater will be your return on investment. There are more reasons than one for you to start investing early in your career. Let’s look at the various benefits of early investing.
The Effect of Compounding:
When you regularly invest from the start of your career, you are increasing the return you receive on your returns. A monthly investment of as low as Rs.1,000 or Rs.2,000 will have a large impact on your financial position. Let’s understand the effect with a few examples:
Example 1: X is 25 years old and has 35 years left for retirement. He starts to invest Rs. 1000 per month for 35 years at a return of 12% per annum. The corpus left with X at the end of 35 years will be Rs. 64 lakhs.
Y is 30 years old and has only 30 years left for retirement. He also starts to invest Rs. 1000 per month. But as he has started investing late in his career, he can invest this amount only for the next 30 years at 12% per annum. The corpus left with Y at the end of 30 years will be Rs. 35 lakhs. This is the difference 5 years of investment has made to the final corpus value. If Y needs the same Rs. 64 lakhs for his retirement, he will need to shell out Rs.1830 per month instead of Rs. 1000.
To understand the wonder of compounding, let’s look at another example:
Now Y invests only Rs. 1000 per month at a return of 12% per annum. But he invests for 30 years. Y’s total investment is also Rs. 3.6 lakhs - same as X’s total investment. But his corpus after 30 years is only Rs. 35 lakhs. Thus for the same total investment, X’s corpus is much higher than Y’s corpus. This is because X had invested more in the initial years and had allowed this money to get compounded for the total period.
Thus, the most important advantage of beginning to invest early in your career is to realise the full benefits of compounding. There are other reasons why it makes sense to start investing early in your career -
Improvement in spending habits: As you begin to save early in your career to start investing, you have lesser disposable cash with you. This helps you in being more prudent and brings about a discipline in your spending habits.
Money available during emergencies: When you begin to invest early, you would have a comfortable cushion backing you up. Thus, you can be rest assured that your savings will be of use to you in times of need.
Thus, beginning to invest early in your career can help you in building a secure future.
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