Investing wisely is the only way to achieve sound financial well-being in the future. But, the young millennials today have the mindset of ‘living in the moment’ which keeps them away from the world of investment.
The thought of investment or financial planning is in the least of the priorities list. Financial planning for beginners takes a back seat as the focus gets more on immediate need.
It is important to understand the fact that your hope and dreams can be achieved only by the right planning of your finances.
‘’I started investing at 11, but regret not starting earlier.’’ – Warren Buffet
Like one of the most successful investors Warren Buffet regrets, plenty of investors hold the similar regret of ‘not starting early’ in the later years of their life.
As seeds sown today help you bear fruits in the future, for your dreams to flourish you need to plan and invest today. For most of the young earners, the word ‘investment’ is meant for middle-aged people who are nearing their retirement.
But, the perfect time for investment is when you are in your twenties, years in which you can plan for all your major life events. Now is the time to understand the benefits of investing and be a visionary to plan for your future financial well-being.
Here are five major reasons to start investing in your 20s:
1) You can Access the Power of Compounding
One of the main advantages of investing early is the power of compounding benefits to grow your investment. When given enough time and invested wisely, the power of compounding does wonders to your wealth creation process. Compounding means reinvesting your earnings and earning a return on both principals and reinvested money.
The power of compounding helps your investment grow at an increased rate. The compounding effect increases with an increased investment time horizon.
That means, the longer you stay invested or earlier you start investing, the greater will be the power of compounding on your investment.
Let’s understand the benefit of compounding effects over the long-term on your investment with an example:
Let’s say you would like to invest INR. 2,000 monthly in a large-cap equity fund (Systematic Investment Plan) for the next 30 years.
Let’s assume you are 25 years old saving with a vision to build a reasonable retirement corpus. Coming back to the investment, large-cap equity funds are considered to deliver good returns over the long run, say about the annualised return of 15% to 30%.
However, let’s assume your investment into a large-cap equity fund delivers an average annualised return of 12%, your total investment over 30 years, i.e. INR 7, 20,000 would deliver an estimated return of INR 63, 39,828.
That means, the total value of your investment at the end of 30 years would be INR 70, 59,828, which is nearly tenfold growth. Let’s say, if you make the same investment at the age of 35 years for the next 20 years, you would invest INR. 4, 80,000.
Let’s assume the investment delivers an annualised return of 12%, your estimated earnings would be INR 15, 18,296 and the total value of your investment at the end of 20 years would be INR 19, 98,296, which is fourfold growth.
Power of Compounding on Equity Mutual Fund SIP Investment:
|Particulars||Number of years of investment|
|30 years||20 years|
|Monthly Investment (in INR)||2,000||2,000|
|Number of Months||360||240|
|Total Investment (in INR)||7,20,000||4,80,000|
|Assumed annualised rate of return||12%||12%|
|Estimated total earnings (in INR)||63,39,828||15,18,296|
|Total value of investment (in INR)||70,59,828||19,98,296|
That means, with the power of the compounding effect, investing INR 2, 40,000 over a 10 years period can make a huge difference of INR 50,61,530.
So, Invest early and let the magic of compounding power work in your favour.
2) You can Exploit the Power of Time
Time plays an important role in the potential success of your financial life. Time is money! There is a cost attached to the time not utilised wisely. When you are in the twenties, you have fewer responsibilities on your shoulder.
Bigger responsibilities like taking care of the family, elderly, and other household responsibilities are yet to set in. Hence, it is a perfect time for you to focus more on investment. As you have just started earning, you may not earn big, but you can invest a bigger portion of your earnings. Investment for beginners is not rocket science.
By devoting time and energy, you can gain the required knowledge on financial products and various investment options. As you understand and explore investment options, you can create an investment strategy for your long-term wealth creation.
Systematic investment plans are great investment options to explore the equity market and grow your money.
As you will have a longer time horizon for each of your financial goals such as buying a car, wedding, buying a house and retirement, etc. You can consider investing a major portion into ‘high risk, high return’ asset classes such as equity. As a young investor with a higher risk appetite, you can explore various investment options.
Choosing the investment wisely is more important to earn an inflation-beating return and accumulate a reasonable corpus for future goals.
Time value of money and inflation are two major elements to be considered while doing financial planning for beginners. We all know that the value of money decreases with time. A sustained high rate of inflation also brings down the value of your money and its purchasing power.
For example, if a mutual fund investment generates a post-tax annualised return of 15%, the real rate of return by the investment would only be 12.38% per annum after factoring in inflation at 5% per annum.
In simple terms, your investment selection should be depending on the amount that you need for your future goals.
Systematic investment plans can make a great investment for beginners as it allows you to set aside a fixed amount regularly every month and also allows you to benefit from volatility in the equity market.
SIPs will also increase the return potential over the long run to achieve your goals. There are other options also to consider such as exchange-traded funds (ETFs), direct equity, and REITs (Real Estate Investment Trust) to set aside your bonus money and diversify your investments.
Any of the investment options that carry high risks such as stocks or real estate, when you have long years ahead, you can recover from potential losses along with potential capital appreciation.
With time your small investments can also reap good benefits.
3) Helps you Avail Financial Security at Reduced Cost
When you are young and in sound health, you can avail yourself of life cover and health cover at a reduced cost.
Financial planning for beginners starts with insuring and availing financial security against unforeseen events in the future. Term insurance and health insurance are two main essential requirements to avail financial security.
When you start investing in your 20s, you can avail yourself of much higher life cover and comprehensive health insurance coverage at a reduced rate of premium. Let’s take an example to understand this benefit of investing.
Let’s say you are buying a life insurance coverage of INR 1 Cr at the age of 25 years costing you anywhere between INR 7,000 to 8,000 annually (INR 600 to INR 650 monthly).
The same policy for the coverage of INR 1 Cr may cost you anywhere between INR 11,000 to INR 12,000 when you buy at the age of 30. This works similarly for health insurance. Let’s say you are availing of INR 5 lakhs coverage for an annual premium of INR 6,000 (INR 500 monthly) when you are 25.
The same policy with similar coverage would cost you approximately INR 9,000 when you are 30. Hence, start investing in your 20s to avail financial protection at a reduced cost.
4) Helps you Build Corpus for Future Goals
As you start your career, you may have various dreams in your mind such as buying your favourite vehicle, a fancy vacation to your favourite destination or buying the latest smartphone.
If you are recently married, you may want to surprise your spouse with an expensive gift. Dreams are many! But you need to be financially well equipped to achieve those dreams.
Though there are credit cards and personal loan options available, making money in your 20s can save you from debt traps. Systematic savings regularly can help you accumulate wealth over some time to achieve each of your financial goals or dreams.
Financial planning for beginners hence plays an important role in shaping up a sound financial life.
5) Shields you against Financial Emergencies
Emergencies can pop up anytime unexpectedly such as the Covid-19 pandemic that we are facing right now.
Pandemic and many other events can lead to the economic downturn, loss of job, etc. leading to many financial difficulties. You can never be too secure as uncertainties pervade our life.
Making money in your 20s helps you shield yourself against such financial emergencies in the future.
Now that you understand the need to start investing in your 20s, you might wonder how to start, how to plan, or how much to invest as a beginner. Financial planning is a broad concept with various key elements to consider in the planning process. This involves insurance, paying off your debts, creating a budget, and then investing in the right products.
But financial planning lays down a strong foundation for your long-term financial independence and overall well-being. Here are a few important tips on financial planning for beginners. Let’s take a look!
Key tips on financial planning for beginners
1) Identify and set your goals
Identifying and understanding the financial goals is an important aspect of investment for beginners. Once you have a clear vision of what you want in your life, it becomes easy to craft a plan to reach those goals in the order of your priority.
Once you set your goals, you can assess your ability to take risks while investing. With time, your goals may change, which needs to be considered in the ongoing financial planning process.
2) Create a budget and track your expenses smartly
The next step is to streamline by creating a budget and sticking to it. Having a monthly budget plan inculcates a financial discipline in you.
If you do not track your income and expenses, you will find yourself struggling for finance at the end of the month. You need to track your monthly expenses smartly so that you can set aside a major portion of your income for investments.
Tracking expenses does not mean cutting short on the necessary expenses and also some on the fun element. All you need to do is get organized and disciplined while managing your monthly income.
Additionally, you can look for ways to increase your monthly income or cash flows.
3) Craft a plan to get out of debt
Student loans, credit card outstanding, and personal loans can cost you heavily when you don’t manage them effectively. Even with a feasible budget, getting out of high-interest debts can be challenging.
To get free from these high-interest debts before you reach your 30s, you need to have a solid plan. For example, when you get your first hike in your job, divert your extra income towards your student loan instead of spending more on lifestyle.
4) Insure adequately
Investment for beginners should start with buying insurance. As soon as you start working, securing yourself and your family should be your priority.
Even financial advisors recommend insuring yourself adequately before you start with your financial planning. Adequate life cover and health cover are an important necessity.
Health emergencies can evade your entire savings. Hence, shield yourself before you plan. Availing insurance also provides you tax benefit under Section 80C and 80D of the Income Tax Act, 1961.
5) Create an emergency fund
Always have 6-8 months of your income as an emergency fund to deal with unforeseen circumstances. Having an emergency fund protects your investment.
6) Plan your taxes
Tax planning is also an important aspect of financial planning. Your investment choices should be in line with the tax efficiency.
7) Create your investment portfolio
Your investment strategy should be goal-based. As you have the advantage of time, you can allocate a higher portion of your money into equity mutual funds and equity keeping low exposure to safe investment options.
Create a well-diversified investment portfolio to manage the overall risk and to maximize the potential return.
8) Monitor and review your investments
Once you start investing, it’s important to keep a tab on those investments, review and revise whenever there is a new opportunity. Your income and expenditure keep changing with your age.
Hence, review and change your plans to keep them in line with your goals.
Financial planning for beginners not only requires time but also needs basic financial and investment knowledge.
The only way to get skilled to plan your investments is by increasing your financial literacy.
Boost your financial literacy!
There are many ways to boost your financial literacy. Some of them are:
1) Make use of the digital platform
The digital platform is a good place to brush up on a few financial terms. You can get plenty of information online to understand any financial product or investment option. Investment for beginners can get easy with valuable information available on the net.
However, information available on the digital platform may not always be correct and up to date. Hence, you cannot solely base your investment decisions on that information.
2) Seek expert help
You can get an in-depth insight on any investment option or on building a diversified investment portfolio, seeking expert help can add great value.
A financial advisor can help in financial planning for beginners and guide them through the entire financial journey. However, these services come at a certain cost. Investment for beginners can get easy with the help of Robo advisors or virtual advisors who are relatively cheaper.
You need to evaluate if the advisory cost works well for you or not in the initial years of your career.
3) Newspapers and podcasts
Business newspapers and podcasts on financial planning for beginners can help you gain a lot of information to equip yourself with financial knowledge.
You can get tips and advice on a variety of personal finance aspects.
4) Enroll in a quick financial planning course online
If you need to gain in-depth insight and be serious about stepping up your financial literacy level, enrolling on short-term courses is the best option. These courses are specific.
You can choose the aspect (such as financial planning, investment basics, and equity research, etc.) in which you need deeper insight and then take up a short-term course to boost your knowledge.
Taking up these courses can help you over the long run in financial planning.
All that you need to do as a beginner is to devote time to understand the investment options available and then plan your investment depending on your financial goals and the need.
You can learn the basics of investing in no time. One of the best ways to learn on investment for beginners is through the courses of Koppr Academy. One such course on early financial planning is ‘How to Make More Money’.
This course helps in financial planning for beginners. You can learn the benefits of investing early, identify your goals, create a budget, efficiently save tax and make rational investment decisions to achieve financial