Investing To Create Wealth In Current Fiscal Year

Investing In Your 20's

Investing is an excellent way to build wealth and plan for your financial goals. It’s also the primary method for saving for retirement, and it can help you reach many other financial milestones along the way.

Young people have a considerable advantage when it comes to investing. By starting in your 20s rather than waiting until later decades, you have the potential to grow significantly more wealth, take advantage of technological innovations, and take on slightly more risk.

How much to invest

• The first thing you need to do is save as much as you can to invest. For this, you can divide your income into three categories – Needs, Wants, and Savings.

• Dedicate a fixed percentage of your income towards savings. The Thumb rule is 50:30:20 i.e. 50% for needs, 30% for wants, and 20% for savings. But now that many of you are living in your homes due to work from home, you may afford to dedicate a larger part of your income to savings.

• If you dedicate a fixed amount to saving, you will be disciplined. And, you need to be disciplined in your 20s for better returns at a later age. The saving you want to do every month should be a realistic number. You should optimize it. Spend but not splurge!

Before investing

• First, It is not right to immediately start investing. Instead, you should clear off your debts (credit card dues, loans, etc.) as these make you pay very high interests.

• Second, ensure you have your life and health insurance. Insurance covers are necessary to meet unexpected emergencies.

• Third, have an emergency fund. This can be equal to 3-6 months of salary expenses. An emergency fund can also be created along with investing.

• Fourth, invest in yourself. Learn new skills or buy new equipment that may help you do earn more.

Where to invest

• There are three options: Equity, Debt, and Alternative investment

• Before discussing the benefits of investing in your 20s, it’s important to understand what that actually looks like. 

• Investing means putting your money into financial products and hoping for a return. While investing tends to have a greater return than saving, investments generally aren’t federally insured like savings accounts.

 Common investment products include:

• Stocks

• Bonds

• Mutual funds

• Exchange-traded funds (ETFs)

• Real estate

• Commodities, like gold

Many people also invest through taxable brokerage accounts, which can be used to purchase a variety of assets. These investments are made with after-tax dollars, meaning you will end up paying taxes on your earnings. 

The Magic Of Compounding

• Einstein called compounding the 8th wonder of the world because those who understand it, earn it, and those who don’t understand it, pay it. You’re in luck because we’re going to help you understand it.

• Compounding simply means that your interest earns interest on top of itself and the principal amount. Assets like mutual funds are the prime example of the power of compound interest. 

•  Let us understand this point with a hypothetical example. Two persons deposit a sum Rs 10,000 with the local money lender. The money lender agrees to pay them 1% as interest each month but gives them two options. Either they can withdraw the interest each month or put it back with the money lender and grow their deposit. While the first investor decides to withdraw the interest each month, the second investor decides to put the interest back with the moneylender. What happens at the end of 25 years?

• The first person has withdrawn the interest of Rs 100 each month and spent it. He is still left with the deposit of Rs 10,000 at the end of 25 years. But what about the second person who reinvested the 1% interest each month. At the end of 25 years, the second investor will be sitting on a corpus of Rs 197,885/-. If you are surprised how the second investor grew his wealth nearly 20-fold, it is because of the power of compounding. When you keep reinvesting the money, then not just the principal but event the accumulated interest starts to earn interest.