Unlocking Wealth – The Power and Benefits of Early Investing

Table of Contents 

1. Introduction
2. The Power of Compounding
3. The Impact of Inflation
4. Seeing Investments as Trees
5. Long-term Investment Horizon
6. The Reduction in Financial Stress

1. Introduction

Warren Buffet, the Chairperson of Berkshire Hathaway, said,

“Don’t wait to invest – invest and wait”.

It is true that building wealth and securing one’s financial freedom is impossible without investing. Since time is one of the significant factors that can create a massive impact in the returns generated from an investment portfolio, discussing the importance of starting investment at an early age becomes pertinent.

2. The Power of Compounding

Compounding is the process by which money multiplies at an accelerated rate. Due to the magic of compounding, an investment generates earnings on its earnings over time. The earlier one starts, the more time one provides for investments to prosper and compound. Therefore, even if one starts investing with a small amount, it will create significant wealth over time.

For example, an investment of INR 10,000 at an interest rate of 8% will generate INR 46,609 in 20 years, when compounded annually.

However, if one is simply saving INR 10,000 at home or a locker, it will remain INR 10,000 even after 20 years. More so, its purchasing power will fall due to the increasing rate of inflation.

On the other hand, if one is saving INR 10,000 at a simple interest of 8% for 20 years, it will only result in INR 26,000.

This power of compounding can make one think of starting early in order to capitalize the benefit.

3. The Impact of Inflation

Inflation is a term used in common parlance, which means the rate at which the purchasing power of money gets eroded over time and the prices of goods and services rise sharply. Hence, it is important to consider the impact of inflation while making investments.

Any financial instrument that has generated less income per annum than the average inflation rate would be unable to battle with the impact of inflation and would only result in the loss of purchasing power.

4. Seeing Investments as Trees

People generally get disquit seeing the falling prices of their investments and waste their time praying for an instant increase in their portfolio value. However, it would seem appropriate to see investments as trees. Considering that one cannot sow a seed today and get the grown tree tomorrow, it takes time for the seed to grow into a tree and pass through different seasons of ups and downs. Likewise, investments take time to give their expected returns and pass through the economic cycles of downfall and rising.

5. Long-term Investment Horizon

Investing is essentially a long-term process and it is important to have a long drawn-out investment horizon to reach one’s financial objectives easily. Starting early helps one by offering a larger timespan for investment. It also gives a lot of time to realize the financial goals gradually and without much effort and a big investment amount.

For example, one’s goal could be generating a corpus worth INR 2 crore once he/she retires at the age of 60 years. Thus, if he/she starts investing from the age of 25 with an annual sum of INR 1 lakh at the rate of 8.5%, he/she will seamlessly generate a capital of 2 crore at the age of 60. However, say his/her investing gets delayed by 10 years. Then, to generate the same capital at the end of 60 years, he/she will have to invest a minimum of INR 2.4 lakhs per annum at the same interest rate which is 2.4 times of the annual investment if he/she had started investing earlier.

6. The Reduction in Financial Stress

Investing early is essential to reduce a whole lot of financial stress in the long run. Starting early investment gives an opportunity to create a steady corpus which can help in two ways viz. one will have financial security for both short term and long term financial goals and further, it will give one the required peace of mind.

Say if one has a sufficient emergency fund built by investing in low-risk, fixed-income securities, it can help one live peacefully and protect against contingent situations where there is an immediate need for cash.

Investing early also helps one attain other short-term financial goals like purchasing expensive and essential items without depending on bank loans, personal loans and credit card finances. Taking loans and credit will only build debts and lead to more financial stress.

Let us differentiate the two scenarios of starting investing at a later stage and how one can achieve the financial goals by starting early, with the help of an example.

The given table highlights the importance of length of investment horizon, that is, even after doubling the amount of SIP (Rs. 20,000) at the age of 40 years, the total corpus (Rs. 1.23 Crore) is less than 1/10th the corpus (Rs. 11.41 Crore) with the SIP started at the age of 20 years even with half the amount of SIP (Rs. 10,000).

Thus starting early is more important regardless the amount and one can a plan best fit to meet the future financial goals with current constraints of income and expense streams duly considered. As the saying goes – “Time is money”, the earlier one starts investing, the more the investments get time to grow.