The age bracket of 20-35 is a significant turning point in one’s personal, professional, as well as financial life and is primarily the defining period in an individual’s livelihood. The decisions (more importantly, the financial decisions) made during this time period in one’s life can be seen as a ‘make or break’ while making it relatively easier to reinvent oneself and trigger self-reflection. While in 20’s, a person might feel that retirement is a very distant concern and hardly may seem factual at all. However, the key to bona fide financial success in the future is INVESTING in the initial stages of your career, intending to achieve financial independence or financial freedom. In general, financial independence can mean different things to different people, but commonly the term means that you take ownership of all your expenses without having to depend on your parents or legal guardians to provide monetary support. An early investment teaches the actual difference between investment and savings, how time plays a crucial role in money multiplying, what is the power of compound interest, among many others—deciding how to invest your money and what financial instruments to choose can be overwhelming at first. Luckily, the advancements in investment technology and the plethora of options available for various income brackets help make more informed investment decisions.
Investment Versus Savings
Investment and savings are essential to building one’s financial foundation, but they are not the same. Before you can decide how and where to park your money in order to achieve financial independence, it is necessary to identify when to invest and when to save. In simple words, savings is the act of setting money aside for unforeseen expenses or future purchasing. Saving is the process of parking your money in safe and liquid securities. Here, capital preservation is the primary aim, and then you can think about getting some returns gradually, if possible. There are various savings options such as savings accounts, certificate of deposits, among many others. A savings account usually involves little or no risk with guaranteed interest depending on the amount of savings and more stability. This type of account helps you to save money for specific short-term goals with very easy accessibility.
On the other hand, investments are aimed at prosperity building. It is a process wherein you park your funds in assets like real estate, small businesses, gold coins, stocks, bonds, mutual funds, etc., with the primary goal that your investment will make money for you. Investing is the process of using capital to generate a safe and acceptable return over a long period of time. Typically, these returns are potentially higher than a savings account because the funds remain untouched longer. Since investments can be volatile over short time periods, it is ideal that you invest the money that you do not want to access immediately. Preferably, this money should be parked for a minimum of five years.
These two concepts are fundamental to financial security and stability and are both required to achieve your financial goals. Once you have understood what the two mean theoretically, it is crucial that you lay out your financial strategy for the future and understanding your current financial standings. Knowing for sure when to save or when to invest can be very tricky and unique to each person. The thumb rule is that your periodic savings should be enough to pay your personal expenses, build an emergency fund, pay off all debts, and jumpstart a retirement account. You also need to factor in your one-time goals, such as purchasing a house or a car. Some large capital requirements like these require a steady investment plan today. Saving money typically comes before investing money because it is this saved money that will provide capital to feed your investments. Suppose you are unable to decide or make a call. In that case, the correct thing to do is seek suggestions and recommendations from a financial advisor, depending on your flexibility and the time frame of your goal.
Why Invest Early?
Being young gives you an absolute edge over others when it comes to investing. Investing in your 20’s for the identified long-term financial goals can stimulate the magic of compounding in your favor, which translates into more wealth. As you progress in your investment journey, young people have more time to learn and recover from losses by re-evaluating their investment strategies over time. Young investors are relatively more tech-savvy, which enables them to perform in-depth research about various financial avenues and apply online investing tools and techniques. While money might be tight, young adults have more time to reinvest their earnings and have a greater risk tolerance to compound or multiply this invested money. An investor’s age is directly proportional to the amount of risk they can withstand. The older you grow, the more burdened you are with financial responsibilities or commitments that restrain you from taking risks that have a fifty-fifty probability of failing or succeeding. The initial stages of your career give you the advantage of not worrying about such obligations while also giving you an edge to sustain the volatilities of riskier investments.
Understanding the power of compound interest is an essential factor while investing. Basically, compound interest shows how you can actually put your funds to work and watch them grow. Albert Einstein once noted that compound interest is one of the most powerful forces in the world and claimed it to be the ‘eighth wonder’. In simple words, compound interest means that you begin earning interest on the original principal amount AND on the interest generated from this money over time. When you earn interest on the initial investment, that interest then earns interest on itself, and this amount is compounded periodically, hence, creating a snowball effect. Compounding is one of the most fundamental concepts for wealth building; the more you invest, the more it will grow, and the most significant factor is TIME. The longer you will leave your funds to earn interest-on-interest, the more it compounds. Time is an investor’s best friend and the only thing that makes compounding so effective. This puts you ahead of people who choose to invest at a more secure or stable stage of their lives.
Self-investment and Life-changing Returns
The most superior investment of all is investing in yourself. In today’s age and economy, the time, effort, and money you invest in yourself are directly proportional to the quality of life you choose for yourself. The phrase ‘investing in yourself’ simply means that you prepare yourself to take on any new venture, acquire and update your knowledge or skills, overcome obstacles, and identify opportunities in the current volatile world. No matter what direction the economy moves in, you are your most important source of wealth.
The self-investment element highly influences your personal, professional, and financial growth. The more diversified and unique your skills are, the more value you bring into your workplace and hence, the more competitive you become. Starting to develop and modify these attributes at a young age can help you mold yourself in a way that helps you sustain for the future. Your personality and attitude also play crucial roles in your financial success. They directly impact your risk-taking abilities and investment objectives. Additionally, it is necessary to continually educate yourself on various investments and investing strategies. This will enable you to stay ahead in your game and build a more long-lasting financial portfolio.
The ability to network and your associations also influence the way you think and build and maintain relationships. It would be best to try to surround yourself with people who encourage and motivate you to bring out the best in you, positively push you to make the right decisions with confidence and help you gain financial knowledge from their real-life experiences. Networking opens up many doors to financial success/freedom. Communicating and sharing ideas or perceptions with others at a young age can inspire you to learn more about what the financial world has to offer as well as discover notions that you never came across on your own.
The bottom line is – the earlier you start saving and investing, the earlier you will reach financial independence and success. You do not need a massive amount of savings to park your funds; you just need a considerate amount of finances that can help ignite your financial journey. Do not expect to get really rich really quickly. You should have a very patient approach and always keep reworking your strategies towards the outlined financial goals. And, always remember YOU are your biggest asset. To quote Warren Buffet, “The best investment you can make is an investment in yourself. The more you learn, the more you earn.”
– Aishwarya Lalchandani (Student of MA in Applied Economics at Christ University, Bengaluru)
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