The simple answer to the simple question of why do we need to invest is that we need to create wealth. The trouble, however, is that most of us only have a single source of income. On the other hand, there are various needs that can either be immediate, medium-term, or long term. Basically, if we were to move from one goal to another with only our accumulated savings, there would be nothing left for our long term goals. This makes it really important to not just save money but to also use it wisely to create investments, which can then create wealth over the long run.
And more often than not, starting early can make all the difference. There is a common quotation that goes as follows. If you somehow lose an hour in the morning of the day, you will then automatically spend the entire day looking for it. Similar is the case with investing. If you miss starting early, you will spend years trying to build the same wealth that you could have made so easily if you had started early. Youngsters who just start on their jobs do not understand the importance of investing, or of retirement, which is really far away. However, just like young children go to school to prepare for their college and career which is around a decade and a half away, young earners should start to invest in their retirement, which is still four decades away.
The advantages of starting to invest early are indeed unparalleled and plenty. In many cases, when you just start to earn, you don’t have anyone depending on your income. Thus, you do have extra funds on your hand if you start to save early. Of course, at this stage, you would want to buy a lot of products and indulge in some material pleasures, and this is completely okay. However, if you manage to start investing early and can invest even a small amount, to begin with, you will see that your savings will grow considerably, thanks to the power of compound interest.
Here is an example to explain this properly. Let us say that X starts to invest INR 1000 every month for his retirement 30 years later. The interest rate here is 12 percent per annum. By the end of the term, the person will be able to gather INR 30.8 lakhs. Y, on the other hand, invests INR 12,000 every month for 10 years. When the interest rate is the same, Y would end up with around INR 26.9 lakhs at the end of the tenure.
Notice how Y invested a total of around INR 14.4 lakhs which is greatly higher than what X invested (INR 3.6 lakh). Moreover, in the end, Y ends up with a final sum which is 13% lesser than what X gets.
And interestingly, these figures do not take into account the stress and strain of having to suddenly catch up on your investments, as compared to the ease of investing small amounts every month for a longer period of time. Apparently, time and discipline are the most important factors when it comes to achieving your financial goals with relative ease.
A lot of us tend to have a single source of income. On the other hand, we have a number of financial goals, which different timelines. Thus, saving in a bank is not possibly going to give us adequate returns. This is precisely why planning investments to create wealth over the long term is so important. And as you consider beginning your investment journey today, it is also important to keep in mind some poor decisions that investors often make in the beginning, and how can you avoid those.
Waiting for the ideal plan:
There is no use in spending months and even years waiting for a full-proof investment plan. Because at the end of the day, there is no guarantee that your perfect plan will be perfect indeed.
Meanwhile, you might considerably lose out on future returns. Thus, start simple if you must, but start somewhere.
Investing for the short term:
Try to things beyond a certain period of months or years. You must align your short term goals and investment plans with your long term ones. A good rule of thumb here is to use debt investment for a period of up to three years and to then rely on equity for goals that are greater than five years. Most likely, the bulk of your investment will be for the long term.
Playing it too safe:
With small investments in debt schemes, you cannot build a large corpus. If you are looking for substantial returns that exceed inflation, you need to look at equity. Equity is the best investment instrument in the long term, so make sure you don’t hold any misplaced fear about this asset class.
Relying on tips:
Refrain from relying heavily on tips to get rich faster. This is a full proof plan to lose money. Have faith in your plan and it will ultimately payout.
Getting in and out of investments is not a good idea. This strategy will rob you of your chance to make decent returns over a long period, and the cost of trading will be higher too in terms of the taxes and transaction expenses.