- Compound interest earned from investing helps grow your money quicker than anything else.
- The sooner you start saving and investing for retirement or any other goal, the more time you'll have to take advantage of compounding.
- By starting a regular savings plan as soon as possible, you can take advantage of compounding by increasing your return on investment.
Benefits of Investing/Saving Early
When it comes to financial planning, it’s never too early to start saving. The early bird gets the worm is an idiom particularly worth adhering to. If you begin by investing early in your working life, you will be able to have the necessary funds to achieve financial independence when you no longer enjoy the benefits of a salary. The fact of the matter is that the earlier you begin your financial planning journey, the better it is for your future especially if you fancy a big house, an extravagant car, and the works.
It is a proven fact that even the smallest investment can have a telling impact on your financial status. Therefore, by prioritizing wealth management and by staying invested, you will have put in the foundations that you need to meet your long-term financial goals. Although saving or investing may not be your top priority in your 20s, it will ultimately allow you to live the life you dream of. As all good habits are to be learned early in life, making savings a habit as a youngster could go a long way in shaping your financial future.
What Is Compound Interest?
We've all heard the argument for saving early so as to let the power of compound interest do the heavy lifting for us. In fact, master physician Albert Einstein famously had this to say about the magic of compounding interest, "Compound interest is the eighth wonder of the world. He who understands it earns it…he who doesn't…pays it."
Compound interest can be defined as the interest calculated on the initial principal and also on the accumulated interest of previous periods. To put it simply, compound interest essentially means that you are earning interest on your interest which can help your wealth to rapidly snowball into a fortune. The idea of compounding returns has also been widely touted as making your money to work for you.
How Can You Make Compounding Interest Work for You!
Here’s another quote by Warren Buffett on Compounding Interest which should get you thinking; “Someone is sitting in the shade today because someone planted a tree a long time ago.”
By continuously reinvesting your earnings, you are exponentially increasing your return on investment. Needless to say, Compound Interest will help make a deposit grow at a faster rate as compared to simple interest, which is simply interest calculated only on the principal amount. Shrewd investors with great business acumen understand the benefits of investing early and take advantage of the potential gains from compound interest. And, the longer the savings period, the more time one gives to the interest income to grow. If you're still wondering why you should sacrifice that Rupee now for a potentially better tomorrow, let’s illustrate this with the help of an example.
25-year old Rajesh invests Rs. 2,000 annually over 10 years in an investment fund with an average growth of 10 percent. When he retires, at the age of 65, his investment would have grown to Rs. 556,197.
Similarly, Shilpa, age 34, who invests Rs. 2,000 annually over 30 years into an investment fund. At age 65, Shilpa who has invested three times as much as Rajesh will have only Rs. 328,988 in her retirement account.
Rajesh and Shilpa both invested the same amount a similar interest rate but Rajesh ended up having a larger corpus. This was because he started 5 years early and the power of compounding worked for a longer time in his favor which meant that he had Rs. 227,209 more than Shilpa to spend during his retirement. In this example, Rajesh, who began investing early and gave his money time to earn compound interest ended up getting significantly higher returns. Today, with age on the side of most youngsters, you can avoid the same mistake that Shilpa made of waiting too long to start contributing towards a well-crafted investment plan.
To summarise, taking advantage of the power of compounding is the single most important reason for you to start investing right now. Keep in mind that every day your money stays invested, is a day that your money is working for you. And, the longer the savings period, the more time one gives to the interest income to grow which, in turn, will help create a large-enough corpus enough to meet your financial goals and contribute towards a positive financial well being.
Although compound interest favours those that start early, even if you haven’t started investing yet, all is not lost. All you got to do is simply make up for your shortfall in years by increasing the amount you save. However, if you are still young don’t make the mistake of waiting to play catch up. You never know what life is going to throw at you in the future so be prepared by saving early to ensure you have a secure fall-back option in times of need. Let compound interest do the work for you.