Photo by Andrea Piacquadio from Pexels

Finally, we arrive at investing!

It’s perhaps the most constructive use of savings. If you save and then invest well enough you can literally buy yourself financial freedom sooner rather than later. This then enables you to be the best version of yourself, without the anxiety of money matters looming over your head.

That is one of the reasons why your focus has to be paramount on getting this part of your money journey right.

But where do I begin. There is so much to talk about when it comes to investing.

Of course, readers will be happy if I jump straight to “Where should I invest?“

Unfortunately, that’s the last part of this equation. There are many blanks to be filled on the way there.

The focus for this blog is going to be on two things – firstly, the importance of starting early and secondly, figuring out why you’re investing.

Starting early and what it’s worth

If there is one word which describes the importance of starting early, it has to be compoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value.... CompoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value... in simple terms is earning on earning. What it means is that you are able to earn more on the interest, dividend or profit you gain out of your original investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... – thus, earning return on both your principle and your profit.

It’s usually used and understood better in context to growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... like equity, however, compoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value... is not a phenomenon restricted to any particular asset or type of investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains.... Rather it is a process that has more to do with investing discipline ie. your behaviour and time.

The longer you hold on to an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... the more you will get out of it. The way you can elongate your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... time frame is simply to start early.

CompoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value... can happen with your fixed deposit interest earnings too as long as you keep reinvesting the money for several years and compoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value... can happen with gains from your equity or real estate investments too.

In the simplest form of compoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value... where you invest just once, let’s say you’re 25 years old and invest ₹10,000 to earn 10% annually net of tax or after tax. You invest and forget – after 25 years you will have ₹1.08 lakh thanks to compoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value....

At the age of 50 you have slightly more than 10 times what you invested.

Now if you didn’t bother at 25 and began investing ten years later – at the age of 50, your ₹10,000 would have grown around 4 times to ₹41,700.

Basically, by starting ten years later you forgo 60% of what you could have earned through the same ₹10,000! That’s a lot to let go of simply because you were lazy to begin.

That is what compoundingCompounding is the concept of earning return on both your principle investment and your profit. It is a way of calculating return that assumes you pull back your return till yesterday and remain invested so that any change in value... is all about – and what you have to do to get this benefit is start early – as early as you possibly can.

To enhance this potential return further you can make regular investing a habit.

Just by making investing a regular monthly habit you can potentially earn at least 10 times more in the same period with the same expected annual return.

Of course, in the latter case you are investing ₹1.2 lakh a year instead of the ₹10,000 one time.

The bigger take away is about building the discipline of regular investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains....

Just starting early and investing regularly can help you achieve financial freedom earlier than you expect. It goes without saying that you have to remain invested rather than pulling out profits and spending them on stuff.

Why are you investing

This is the second part of the equation which you are better off solving early. There can be multiple reasons to start your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... journey:

• Just to experience what wealth creation is about
• For near term goals like travel or buying a bike or car or a house
• Starting to build that early retirement kitty
• Etc.

Whatever your reason to begin investing, you must write it down or at least acknowledge it to yourself.

It’s only when you understand the purpose of investing or your specific goal for which you want to invest will you know where or what type of product to invest in and how much you want to invest.

The answer to this ‘Why’ will enable you to make the right choices in picking investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... products, in deciding how much risk you want to take and how long you need to be invested.

Let me explain. If you are investing today to feed your goal to travel the world in five years, you are unlikely to go all out with high risk equity or real estate investments. Equity returns are volatile in periods less than 7-10 years and real estate carries the risk of illiquidity or not being able to sell when you need it.

Hence, any money you need in less than five years you have to build a portfolio that leans more on fixed-income investments which are stable and steady return. You can perhaps add a sprinkling of equity assets in a way that can give you a bonus if things go your way and if they don’t you won’t lose out on much either.

If you want to invest money for buying a car in two years, then the investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... product certainly has to be a fixed return or steady return one.

If you are building a retirement kitty to be put to use 25 years later, then you can rely more heavily on growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... like equity.

Age matters

It is assumed that the younger you are the more able you will be to take on higher equity risk as incomes tend to grow steadily in early part of the career and individuals have fewer family related responsibilities.

Hence, one assumes higher equity allocation at a younger age.

However, your choice of asset or product will ultimately depend on the stage of life you are in, your earnings and responsibilities.

Having said that, it is a given that the earlier you start investing the bigger your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... pool will grow, provided you are able to remain invested and earn a substantial return.

Summary…

Randomly picking an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... product with a promise of high return or rushing to the bank to open a fixed deposit because that’s what your parents did is a useless endeavour. Your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... needs could be very different, so first write down why you are investing. Whatever the reason, you stand to gain the most if you push yourself to begin early and be regular.