Importance of personal finance and investment in 20’s


Consumption and savings are the most important and basic concepts in financial planning for a youngster. Our education system teaches us almost everything except commerce, which is very important for an individual to understand their finance.

Awareness of investment opportunities and understanding the fundamentals like filing their own taxes or reading a balance sheet can be key learnings that can help them to make informed decisions to align and achieve their goals. This will help them build a robust financial foundation for their personal growth.

Amidst the global pandemic and market disruptions, Indian investors opened 14.2 million new Demat accounts opening in FY2021 which is the highest record. It is almost three times the number in the previous fiscal year.

There is a mental resistance and a bit of indecisiveness faced by them in thinking about whether it is the right time to start investing or is there a need to be more financially stable and have enough liquidity to start investing. Here I would like to mention a few reasons why it is important and beneficial for youngsters to consider investing in the early ‘20s.

Risk Capability

Age becomes a vital factor for investing in the initial phase of your life as it will benefit the young by taking risks and creating an aggressive portfolio like stocks and cryptocurrency with a high risk-reward factor. Ageing will gradually decline the risk-taking appetite of an individual where he/she can consider investing in ETFs, CDs or FDs for low-risk reward for a longer period.

Power of Compounding

Investing at an early age will benefit one with the power of compounding as he/she stays invested for a longer duration in the markets.

For instance, if you invest Rs. 5,000 every month for the next 35 years till retirement in equity mutual funds or as fixed deposits where you will have an average annual return on investments around 9% and 5-6% respectively.

Starting Age

Investment Period

Annual Return on Investment

Monthly Investment

Total Investment

Expected Returns-35yrs

MF

FD

MF

FD

25

35

9%

6%

5000

21,00,000

1,30,44,000

67,24,520

40

20

8750

21,00,000

54,20,850

38,90,500

Currency-INR, MF- Mutual Funds, FD – Fix Deposits

 

In the above scenario, case 1 shows that the returns are almost double the expected returns in case 2 even though the invested amount by the age of 60yrs is equivalent(Rs21,00,000). Now, this is an ideal scenario where the invested amount is consistent till the age of 60 but one can always accumulate a larger corpus by increasing their investment over a period resulting in larger returns. So greater is the investment period, the greater will be chances of increasing your investments and the greater will be returns expected on the total invested amount.

Learning Curve

Young investors have the freedom and time to learn about investing and apply what they’ve learned from their triumphs and disappointments. Young folks have an edge since they have years of studying the markets, developing strategies, studying the markets and developing their investing methods, as investing has a rather long learning curve. Younger investors can overcome investment blunders because they have the time to recover, just as they can tolerate more risk.

 

Savings and Consumption

It is important for an individual to track and analyse their monthly expenditure in order to plan their saving by creating a budget for every month. This will help you to limit the unnecessary consumption of goods and products for luxurious needs. As one tracks his/her monthly expenses on utility, groceries and rent, he/she can create a plan or adapt to a certain quality of life to improve their spending habit

It’s easy to get allured into buying products and instantly regret the purchase right after you make it. It’s important to think over the requirement of that product in your life and weigh its pros and cons, analyse if its existence affects your basic needs to live a life. This does not mean to be a miser for life but rather to expand your luxurious needs along with your financial growth which will gradually happen as your earnings start improving.

The ability to create a budget is a skill that will serve you well throughout your life. Limiting yourself to only buying what you’ve planned necessitates self-control, but it will pay off in the long run when your savings account is a little more padded.


About theyoungcapitalist

Welcome to my blog. To brief about me, Architect in India by profession, dropped out of masters program from US and now in pursuit of my passion in financial markets. Doesn't make any sense, right?.... I have reasonably small experience of around 5 years in derivative segment in Indian markets. This site was set up to help me explore the aspects of personal finance and financial markets. I wish to create a learning and interactive platform for all the youngsters who are new to the markets. I am no expert but a student and open to all kinds of criticism. Please feel free to contact me if any comments, questions or suggestions. Lets learn, earn and grow together.

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