5 benefits of starting investments in your 20s

Early job opportunities with skyrocketing pay packages have allowed today's young professionals to make smart investment decisions right at the onset of their career, which can set them up for a lifetime of financial bliss. Unfortunately, most youngsters miss this golden opportunity. When you are in your 20s, saving and investment usually is the least of your priorities; it is the time to enjoy the new-found financial freedom and living the lifestyle that you worked hard for as a student. Many also have education loans to pay off, and hence, focus on investments much later in their working life. However, what youngsters don't realize is that each delay in beginning their investments is a missed opportunity that could impact the quality of life in the future.

Here is why 20s is the best and the most opportune time to begin your investment journey:

More time to benefit from compounding: Compounding means making money on the interest or gains made from the original investment. Assume that you invest Rs.1 lakh on an annual interest rate of 10%. At the end of the first year, you will earn an interest of Rs 10,000. However, when the interest is calculated next year, you will earn interest on Rs.1.10 lakh and not Rs.1 lakh. Therefore, in the second year, you will earn an interest of Rs 11,000 instead of Rs 10,000. The difference may seem to be small for initial few years, but it will increase substantially over a period of time. So if you remain invested for 20 years, the value of your investment will increase to over Rs 6.72 lakh while under simple interest, it would have been just Rs 3 lakh. Thus, the longer your money stays invested, the higher the gains through compounding.

Higher risk-taking capacity: Investment instruments with higher risk deliver higher returns. In your 20s, usually there are lesser responsibilities and a higher risk appetite. At a later stage, your finances are generally stretched by higher cost of living, family responsibilities, EMIs on house, car etc. and hence, risky investment choices may not be viable.

Bigger retirement corpus: Your retirement corpus should be large enough to cover your regular household expenses along with the medical expenses that usually come with old age. So, if you are planning to retire at the age of 60, and expecting a life expectancy of 80, your corpus should be able to cover your expenses for at least these 20 years. Creating such a large corpus in the later part of your working life can be a daunting task and may not only adversely affect your other investment goals and overall lifestyle, but may also impact the needs of your family. For example, assume that you start investing Rs 10,000 every month in an SIP at the age of 23 years. Assuming that your mutual fund delivers 12% compounded growth per annum, your retirement corpus will be more than Rs 2.38 crores when you reach 60 years. However, if you start investing for your retirement from the age of 35 years, you will need to invest Rs 47,640 each month in that SIP to accumulate the same amount.

Debt-free purchase through goal-based investing: Most people tend to fund their big purchases by taking debt and incurring interest cost, thereby increasing the cost of purchases. For example, if you buy a car worth Rs 5 lakh on a car loan with 20% down payment. At 12% interest rate for a 4-year loan tenure, the cost of purchase will increase by Rs 1.06 lakh, paid in the form of interest. Instead, if you start investing Rs 8,000 each month from the age of 23 in a balanced fund SIP, offering 12% average rate of return, you can easily reach the Rs 5 lakh target by the time you turn 27. Thus, with little forward planning and financial discipline, you can easily make your big purchases without incurring debt and additional interest cost.

Improve money management skills: Ideally, a person should plan his investments commitments first and then, accordingly adjust his expenses. Unfortunately, most young professionals do the opposite. Investing early inculcates financial discipline by forcing you to prioritize your investment over purchases and thereby, keep your expenses in check. The lessons learned from your early years of investment will also reward you in the long run. Over time, as your income increases, you will have a larger amount to spend and it is here when restraint and financial discipline is required. So, simply put, the earlier you start investing, the better will be your financial position in the future. The small sacrifices and discipline during the early years of your professional life will place you better to afford the luxuries in the longer run. It will also help you secure the future of you and your family, even during unforeseen circumstances, and ensure you comfortably accumulate a retirement corpus without compromising on your lifestyle.

By Naveen Kukreja - CEO& Co-founder, Paisabazaar.com