Starting to save and invest early in life is crucial for building a strong financial foundation and achieving your long-term financial goals. In this article we highlight how delaying investment at a young age can have significant consequences in the long term and stress upon the need to start saving and investing as soon as possible to take advantage of the power of compounding with the help of Tom’s story.
Once upon a time, there was a young man named Tom (aged 22 years) who had just graduated from college and landed his first job. Tom was excited to start his career and earn a steady income, but he didn't give much thought to saving and investing. He figured he had plenty of time to worry about that later, and he wanted to enjoy his newfound financial freedom by splurging on fancy dinners, expensive clothes, and weekend getaways.
As the years went by, Tom, now 35, found himself struggling to make ends meet as his expenses continued to rise. He decided to put some of his money into a fixed deposit, hoping to earn a little extra interest. However, the returns on his fixed deposit were low and barely kept pace with inflation. Tom also considered investing in small savings schemes and investment-cum-insurance products, but he wasn't sure if they were the best options for him.
One day, Tom met an old friend, Jim who told him that he had started investing in mutual funds when he was 25 years old. Jim told Tom about the power of compounding, and how starting to invest early can make a huge difference in the long term. Tom argued that he did not have a large sum to invest in mutual funds. Jim told Tom that even small amounts of money can add up over time and that it is better to start saving whatever he can, rather than waiting for the perfect opportunity that may never come. He asked Tom to simply start with a systematic investment plan (SIP) of Rs 3,000/- per month. Jim also told him that he had been doing the same since the age of 25.
Tom asked Jim to elaborate about the power of compounding and how investing just Rs 3,000 per month could help him achieve his financial goals. Jim explained the following:
Tom realized that he had been missing out on the opportunity to grow his wealth and reach his financial goals. Only if he had started investing at 25, he would have successfully more than doubled his corpus and also could have become financially independent much earlier.
Determined to turn things around, Tom began researching different mutual fund options and started a SIP with an investment of Rs 3,000 per month. He also learned the importance of budgeting and started tracking his expenses to make sure he was saving enough money each month. As the years went by, Tom’s mutual fund investments grew steadily, thanks to the power of compounding.
It can be said that young investors often face two significant challenges viz., low income and the tendency to believe they have plenty of time to start investing. Tom's story serves as a reminder of the importance of saving and investing early in life. The calculations shown by Jim illustrate how delaying investment at a young age can have significant consequences in the long term. Such consequences could be avoided if people knew more about the importance of money management. In fact, financial literacy is something that should be taught since childhood.
Financial literacy is a crucial life skill that can be taught to children to help them make informed decisions about their finances and plan for their financial future. Teaching children about basic banking, budgeting, debts and loans, investments and financial planning, can equip them with the knowledge and skills they need to manage their money effectively. One way to teach children about money is to give them small amounts of pocket money and encourage them to budget and save. Another way to teach children about money is to introduce them to basic banking concepts, such as opening a bank account and keeping track of their banking transactions. Investing is another important aspect of financial literacy. Children can be introduced to basic investment concepts and power of compounding by encouraging them to start investing small amounts of money (the money that they receive as gifts and pocket money) at a young age. Investing in finance journals and books that teach children about saving, budgeting, spending, investing and financial planning can also be a great idea. It's important to choose materials that are age-appropriate and engaging, so that children will be more likely to retain the information and apply it to their own financial decision-making.
If children are taught personal finance at an early age, they can avoid the pitfalls of not investing early and can achieve financial independence early in life.
Early personal finance education can help anyone to start planning for their financial future early and with the right tools and strategies, they can build a strong foundation for a secure and prosperous future. So, it is always better to start early and make the most of the power of compounding. Financial literacy can help people avoid financial mistakes that can lead to delays in achieving their financial objectives. Overall, a strong understanding of money management can help people avoid delays and setbacks in their financial lives.
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