The power of compounding and benefits of early investing

Top-seven advantages of early investing

Here are the most important takeaways from the above example that explains about the benefits of early investing.

01. The power of compounding is multifold in early-stage investing

The advantage of early investing is the number of times your investment return compounds (i.e. you earn a return on the return). Out of the total 40 years of the entire investment journey in our example, starting at 20years or 30years means a gap of only 10years. That essentially means 25% of the overall investment span. However, the gap in returns, 8.4x when started at 20 years vs 4.5x when started at 30 years, is significantly more.

02. More time to recover when you begin early

If you incur a loss or face a decline in the value of investments, you will get more time to recover when you begin early. In the above example, the investor who started at the age of 20years has more time to manage the investments.

03. More savings in the early phase of life

To start to save when you are young is possible. The income can be low as you would have just begun the career. Still, at the same time, liabilities and requirements are also limited.

04. Rhythm to save sets-in early

Many people are not able to set a saving rhythm, even when they wish to. That may be because outflows are more than inflows or just that the expenses are not well planned. When you begin investing early in life, mental mathematics works to save first and helps you fulfil the investment objectives.

05. Be in a position to help others

Often you come across situations where either your friend, family member or a close colleague needs money. Your investment or spare money will position you as someone who can help others in the time of need. A sense of satisfaction will prevail when the near and dear ones will remember you for the financial help you once offered.

06. Better risk-taking

More-risk earns a better reward. Usually, young investors have a higher risk-taking capacity and are more likely to achieve a higher risk-adjusted return. Hence, there is a high probability of making a handsome return when you start investing early.

07. Support your early retirement plans

Early investing will help you to save the retirement corpus sooner in life. The amount of money is dependent on several parameters, which are individualized. Irrespective of the goal you want to achieve, an early start will immensely benefit the process.

The meaning and the power of compounding

In the financial world, compounding happens when income on your investment starts to earn income.

Save before you spend

Usually, the Indian households are good at following a regular savings discipline. Being an early investor forces you to save before you spend. A dedicated amount gets earmarked as an investment. It gets removed from the bank account, leaving you to manage expenses from the balance. And, that is the right way to manage the costs. Savings is always a percentage of income, and not residual of income after meeting expenses.

To conclude, there are tangible benefits of early investing

By starting early, you get the most use of compounding returns. Other apparent advantages are –

  • Develop the discipline of investing
  • Exercising patience through market ups and downs
  • Long-duration helps lower the average cost of ownership
  • Ability to better understand the external factors
  • Enough time to plan tax impact
  • Flexibility of take chances and learn from failures and successes

Disclaimer:

The author has used his knowledge, experience, and understanding of the subject to write this article. Any views, opinions, and thoughts mentioned in the article belong solely to the author and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.

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Sagar Parikh

Sagar Parikh

Finance professional by education, author at heart. Through my writing, I want to improve financial literacy to ultimately benefit my readers.