Why You Should Start Investing Early | srei

Why You Should Start Investing Early

It is never too early to start investing. Investing is possibly the smartest way to secure your financial future. Contrary to what most people think, investing is not just for people who have a lot of money to spare. You can start investing with a small amount of money and a central knowhow of the process. With a solid plan, you should be able to learn all about investing as you go. In this post, we introduce you to the world of investments. Let us get started with the basics.

Stocks and Bonds

Stocks are what most people first think of when they imagine ‘investing’. Put simply, a stock is an ownership share in a public company. The piece of stock itself is a claim on what the company owns — its assets and earnings. When you buy stock in a company, you are making yourself a partial owner of the company. If the company does well, the value of the stock goes up (and you get paid a dividend). If the company does poorly, the stock will lose value.

Familiarize yourself with bonds. Bonds are issuances of debt - when you buy a bond, you are essentially lending money to an entity, called the principal. The entity agrees to pay you back the principal when the life of the loan is up, plus yearly interest. That is why bonds always have a life span and an interest rate. However, if you are going to give money to companies and not expect it back for a few years, you should be compensated for the risk you are taking on, and interest rates go up. This leads to a key mantra in investing: The higher the risk, the higher the return (should be).

When to Start Investing

Starting to invest as soon as you begin making money is a brilliant financial move. The reason is a brilliant financial idea called compounding. Compounding is what happens when your interest keeps earning interest, year after year.

If you start early, the effects of compounding can be significantly large. For example, suppose you start investing Rs 1000 a year at age 25. You put it in bonds that earn you 8% a year. Even if you stop investing completely when you turn 35 – you have invested for only 10 years – your total investment will have grown to nearly Rs 169000 by the time you turn 65.

In a different scenario, you do the same thing, but start investing the Rupees 1000 a year at age 35. You keep investing that much every single year until you turn 65.

That is, you invest Rs 1000 a year for 30 years, rather than for just 10 years as in the previous example. How much do you wind up with at 65? Around Rs 125000. So you see, even though you invest three times as much money, you end up with less.

The earlier you start investing, the more you can benefit from compounding. That is precisely why you need to get going as soon as possible. So, when are you making your first investment?

*** Sources: Wikihow.Com/Start-Investing; CNN Money