The early bird gets the worm, and the early investor gets the returns.
I am going to hit the midway point of my 20s this year. The last 7 years have rushed past me in a whirl of academic goals and degree-chasing. Although I did work for one year between my under- and post-graduate studies, I was not earning enough to sustain my basic needs without still having to depend on my parents.
Saving, let alone investment, was a distant dream.
But things have changed. I am finally in a position to consider creating a monetary pool for future purposes, and I am figuring out how exactly to do that. In this series – Beginner’s Guide To Savings And Investments – I will be taking you through the financial plan I have created for myself and my future. From savings to budgeting to investments, this guide will help you understand why you need a financial plan when you have just started out in your career.
This article is about what you need to know before you consider making investments.
Top three things to keep in mind when you want to start investing
One: Define your goals
I am a big nerd when it comes to organisation, and I have recently started creating monthly, quarterly, and annual goals for myself to achieve outside of my career.
Investment is not a one-shot move.
It has to be broken down into short, medium and long term goals which are staggered and achievable. These goals can help create a financial vision board, which in turn will give you the chance to turn big goals into small steps.
Examples: Short-term goals could be saving up for a holiday or a gadget, mid-term goals could be purchasing a vehicle or a target to fund education, and long-term goals can be saving up for a home, or a fund for children’s education.
In order to ensure that you actually follow through, you can actually write down your financial plan and put it up somewhere you can see it everyday, such as in your cupboard, or on your work desk. This will keep the motivation and the momentum going.
Two: Select your investment vehicle
In India, there are options aplenty when it comes to investment vehicles; starting with recurring deposits, fixed deposits (FD), employee provident funds (EPF), provident funds (PF), personal provident funds (PPF), National Pension Scheme, mutual funds, insurance, direct equity investments, et al.
Your choice should be based on your financial vision board, and the level of risk you are willing to take.
Also, before investing, invest in health insurance and other term plans, since premiums are low at this age, and you get bigger cover for a lower price.
Three: Consider a reasonable risk
Especially early in your career, it would be wise to consider which investment vehicle has an appropriate returns/risk balance.
According to an article in The Financial Express, it is not uncommon for people to get carried away with investments with little to no liquidity. Liquidity is basically the extent to which a financial asset or security can be converted into cash.
A few examples of non-liquid assets include real estate, land, and investment-oriented insurance plans.
Volatile assets like bullion (that is, gold, silver, and other precious metals) should be avoided, since their prices fluctuate a lot, and one cannot afford to lose precious capital due to such risky investments at a young age.
Additionally, when it comes to direct investment in shares of companies (that is, playing on the stock market), the more you research about it, the better it works out for you. Organisations like Women On Wealth – which is founded by Kool Kanya Gamechanger Priyanka Bhatia – have affordable programs that ask for small investments, and go a long way.
How to make your own financial plan
Before we go any further, we need to figure out what our own financial plan is.
Look at a financial plan as a comprehensive mind-map of your financial objectives; in particular long term goals in order to achieve a sense of financial security.
All those goals you have set up? The vision board? All of it comes together under the umbrella of a financial plan.
Most importantly though, it has to be tailored to the individual, which means that even if you have the benefit of the financial advisor, your plan will have to be customised to suit your needs.
Thus, before you set out, a good exercise would be to use to figure out which direction you want to go in. Here is a template you can use!
Why you should start investing early in your career
The benefits of compounding interest
The earlier you invest, and reinvest, the more likely you are to receive exponential returns.
Compound interest is (as I recall from traumatic times in high school maths class) interest which you earn on the interest you have accrued on your first investment. It is, as the word suggests, literally the interest which is generated out of previously accumulated interest.
So, if you invest ₹100 with an annual interest rate of 5%, your returns after 30 years would come up to ₹400, where ₹300 is the compound interest you have earned over that period.
Now consider the possibility of investing ₹1000 per month for every single year of your career, and imagine the savings you will have accumulated in 30 years (or more!). It is simply the question of setting aside a small portion of your monthly salary to secure your future.
Investing in your 20s can improve your spending habits
Decision-making is also a compounding investment. When you have made the decision to consciously save, it makes it all the more easier to seriously consider each financial decision you make.
Investment automatically reduces the amount of disposable income you have in the present, making it harder to splurge on wants.
This can help those in their 20s focus more on their needs. It definitely gets harder to make impulse purchases when you have to choose between one expensive meal and budgeting to feed yourself on the regular.
In a world where we are inundated with advertisements, there is value in being cautious about where and why we are spending our incomes. Tightening your own leash is definitely one way to become a conscious consumer.
Plus, in case of a health emergency, or any other exigent circumstance, it would be helpful to have all the money you’ve spent on things you did not need.
The future looks bright (when you don’t have to worry about the money)
What do you picture when you think of the future?
I think about having a final resting place, of travelling without care, and not having to think twice before buying a book I really want.
Reality check: all of these dreams require a secure financial status which is built and sustained through the entirety of my career.
As a middle class girl from a small town, I know first-hand that aspirations can only be fulfilled by working hard and having a plan. The plan? To work towards creating an investment profile which works in my favour.
I have seen many people live comfortably throughout their working lives, but struggle towards the end when they come up short due lack of financial planning and unsound investment risks. This is only further impetus to get my papers in order when I am starting out, so that I can build on the foundation of a preemptive and wise financial plan.
Above all, this is the time to take risks. When we are just starting out, we have the luxury of the rest of your life to earn that money.
I hope this first part in our financial planning series has given you an idea of what you need to keep in mind before venturing into investments. Let us know what investments you’ve made, and if you have any tips!
