Consequences of Delayed Investing on Final Corpus
You should always remember that the cost of delay in investing is enormous. Even one year makes a huge difference. “Now” is the best time to begin investing for your long-term goals.
Considering the Age factor in the determination of whether you should invest or not, will not help. Whatever your age may be, the earlier you start investing the better returns you will get. The longer you wait, the more sacrifices you’ll have to make to catch up the investment corpus. So irrespective of your age, you should not wait more and start investing.
What Is Investing?
- Investing is Putting your ‘Saved money’ into the avenues with an expectation of gaining post-tax positive returns well over and above the inflation so that you can build wealth.
- Investing is a discipline and systematic approach to make your money work harder and compund into a larger corpus over a long period.
- “I am too young to bother about investment…….” You tend to delay your investment each day to the following day with a mindset that it hardly makes any difference if the investment is delayed by few days.
- The sooner you begin setting aside money for your financial goals, the better off you’ll be. The longer you wait, the more sacrifices you’ll have to make to catch up.
- That’s because of the power of compounding—your investments earn income, and that income earns income, and that income earns income, further and so on….
Reasons For Postponing The Investing Decision May Be :
- You may think that you don’t have that magic figure saved up that you need to start investing. And in the meantime, what you do have saved remains idle. Reality check: There is no magic number. Invest now, however smaller the number may be.
- Or you may be wary of making a wrong investment decision, particularly in an unsure or volatile markets. You want to wait for a good time to start. Reality check: Now is always a good time, because no one can predict the markets. Even though market may seem expensive today, it may not make much difference if you are investing for long term.
- If the product or process of investing is seen as complex and requires you to make too many choices from the many options available, you are likely to defer the decision, especially if you are a new investor or someone not familiar with the nuances of investments. Reality check: Start with simple products and get help to make the decisions.
- Often, you like to maintain status quo because you are comfortable with what is familiar. So you stick with investments and service providers even though you know that your money could be earning better returns elsewhere.Reality check: Investment in bad assets can be worse than cash in hand as they are tough to track and tough to redeem. It may need some effort, but you should do it right away.
2 Scenarios – How Delay In Investment Can Cost You Big…!!
Scenario 1 :
- Mr. Ravi is frugal and believes in saving. He knows that he does not have a rich inheritance and hence, needs to save for himself and his family. Mr. Ravi starts investing Rs. 1 Lakh every year. But he does this only for 10 years between the age of 25 years and 35 years, i.e. he saves Rs. 1 Lakh every year for 10 years and then stops.His total contribution is Rs. 10 Lakhs (between age 25 years and 35 years).
- Mr. Kamesh on the other hand, thinks that since he is quite young, he can postpone savings/ investing for future. He thinks that if he does not save starting from the age of 25 years and does it after a few years…even then, he will be able to become very rich.So in this example, Mr. Kamesh starts investing the same amount as Mr. Ravi (Rs.1 Lakh) at the age of 35 years and continues doing it up to the age of 60 years. Mr. Kamesh’s total contribution is Rs. 25 Lakhs (between age 35 years and 60 years). The return assumption in this and further scenarios is 14% per annum.
- Now comes the day of reckoning. Both have reached the age of 60 years. What’s your guess? Who has more money at the age of 60 years? It might sound surprising, but the answer is Mr. Ravi. Having contributed just Rs. 10 Lakhs, Mr. Ravi now owns a huge corpus of Rs. 6.65 Crores…!!!
- And what about Mr. Kamesh ? The answer is that he has good corpus too. But having contributed Rs. 25 Lakhs, he has accumulated a much smaller corpus of Rs. 2.36 Crores. And that is despite having invested for 15 more years than Mr. Ravi.
Scenario 2 :
- Now lets make the analysis more realistic. As we progress in life, our incomes generally rise. And so do our expenses. So shouldn’t our investments and savings also rise with time? Suppose you start your career earning Rs. 20,000 a month. And you also start investing Rs. 5,000 a month at that time. After a few years, your salary is almost Rs. 70,000. And if you are still investing just Rs. 5,000; then you are investing too less.
- So lets get back to this new scenario. Here Mr. Ravi starts by investing Rs. 1 Lakh at the age of 25 years. But over the next 10 years, he increases his yearly investment by a small 5%. So over a period of 10 years (that is between 25 years and 35 years), he invests Rs. 12.58 Lakhs.
- On the other hand, Mr. Kamesh starts late at 35 years with Rs. 1 Lakh a year. But he also starts earning more and more every year and is able to increase his yearly investments by 10% (double that of Mr. Ravi’s 5%). His total contribution over a period of 25 years (between 35 years and 60 years) is Rs. 98.3 Lacs.
- Day of reckoning, Once again, Mr. Ravi has more money when he retires at 60 years!! Ravi manages Rs. 7.94 Crores in comparison to Rs. 5.08 Crores accumulated by Mr. Kamesh.
- Isn’t this amazing? Starting as early as possible and just investing for few years and then just waiting. And after a few decades, you have more money than someone who started late, invested many times more than what you have invested.
1.These 2 scenarios show that if you start early, you don’t need to earn eye-popping rates of returns to accumulate big sums of money. All you need is time. And when you start early, you have lot of time. The earlier you start, longer does your money have the time to grow.
Points to Remember:
- Start early – Starting to invest with the first salary is a very good idea, irrespective of the amount invested. Small money invested with maximum time is same as investing a large money, at later time.
- Investments are monthly bills – An investor should treat his/ her investment as monthly bills and should invest without any delay. Using Systematic investment plan (SIP)/ Sweep in facilities, you can make life easier as the amount gets auto-debited from the bank account on a fixed date.
- Have patience – One of the biggest mistakes people tend to do these days is that they withdraw their investments mid-way thinking that they have already earned decent returns or in anticipation of worse markets in future. It is not a right approach as the pace of returns in initial years is slow and returns start to compound gradually over time. Thus, an investor should wait for their investment to automatically achieve its goal.