What should you be doing if you are a first time young investor?
Your money should work harder that’s what you should be doing. But then there are multiple barriers to this very concept. The bigger question is how should one get started? Well its a million dollar question and that s the topic of discussion today.
Once you are out of college and you have just landed into the corporate world and are quite ecstatic to get your first pay package. It’s a moment that you would cherish for a long long time. After all you have toiled so hard to reach here.The idea of managing one’s own money really thrills.
But then the real question is when should you really start investing rather than saving? You would say saving and investing are one and the same thing then why are saying its different. Well that’s how most of us think.No dear it’s not that way.The sooner you understand the difference between the two (saving and investing) the better for you. When you save you put your money in to fixed income instruments that gives you a guaranteed rate of return. The rate of return might match the inflation rate in the market (let’s say 6.5%) or it may be a tad lower than that. No matter what in both the scenarios you tend to lose.
This is where you need to understand you need to make your money work harder to earn better returns and for that investing is really important – you need to carefully select the products that earn you better returns.
Young earners these days believe everything shall be taken care off on its own and it would happen automatically for them –but if the money that you are saving is not able to beat even the current level of inflation your money is going down or I should say your purchasing power is getting lower so either you should hold your purchasing power or beat it by some mark. The only way you can do it is to start investing in equity rather than savings. You need to think smartly Start investing it thoughtfully.
The first step a young earner should take is to divide your money into broadly two categories: –
First would be your emergency fund (the fund that would be required by you in the next 1 to 3 years) – you should stay invested in to fixed income funds – a mixture of FDs/RDs/Liquid funds/Ultra short bond funds would suffice.
The second category would be the money that you are in all likelihood not requiring it in near future but with a time horizon exceeding 5 to 7 years or plus.
This is where you need to invest methodically. This is where most of you get stuck!! Why. The biggest problem is your thought process.Recently, I met a bunch of new job earners. During my conversation with them I realized they were mentally blocked towards the very idea of investing. Why? Well they think their savings is quite small at this point in time and they should better wait when their salary becomes significant enough for them to invest…with so much little amount what would they really accumulate nothing!!! Is it so!!!
That very response surprised me a lot but then that’s how most of them or I should say everyone of us think…right .
I had to take an extended time to make them understand the whole idea of how compounding functions in real life.
So let’s say a young investor at 25 years starts investing 3,000 per month till he retires at 60 years the total corpus with such a little sum would become a staggering 1.94 crores (@12% p.a.).
If one had waited another 5 years to invest the same little amount it would have been 1.05 crores and so with every year delay this corpus gets smaller.
So did you get the crux of it even a small delay of 2 to 5 years can make a huge difference to the final amount. This is what one can call the opportunity cost of investing ones money with delay. That’s what time value of money can do to your investments. It is so simple yet powerful and yet so complicated because simple is quite complicated these days for people to believe it!! Right (You may refer to my earlier article on this “Simple is quite complicated”). Saving is a habit that’s what we have learnt from our parents but then let’s make investing a habit as it will go a really long way. Think ….think think…time is now.
If you want to save tax you can select one of the ELSS funds online basis their statistics and performance details online. Get started. Now is the time.
If you are not a tax payer or saving taxes is not under your agenda why not choose a balanced fund. Start with a small amount.Gain experience and invest more and diversify over a period. Remember you need to invest regularly. So don’t delay any further get going as now is the time.
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