It becomes doubly important when we realise that one of the major factors that is drawing global attention to our country as a key emerging market is India’s young population: nearly 50% of our population is below the age of 25 (2011 census). Today’s youth are typically interested in leading a fast life, large spending and quick gains. Few are averse to spending most of their income to follow a trendy lifestyle. To generate quick returns, they often do not realise the risk involved in investments such as equity derivatives, commodities trading, etc. So, it is important they learn early on in life about the importance of saving and spending wisely.
*assuming a mix of equity, gold and debt in the portfolio
Start early
The first and foremost rule is to start early. For example, Rs 1,555 saved every month from the age of 25 would return Rs 1 cr at 60 assuming portfolio returns of 12% (See Table 1). However, a delayed start is likely to lead to higher outflows to achieve the same target. A 5-year delay almost doubles the monthly saving requirement from Rs 1,555 to Rs 2,861. This more than triples to Rs 5,322 if the start is delayed by 10 years.
The first and foremost rule is to start early. For example, Rs 1,555 saved every month from the age of 25 would return Rs 1 cr at 60 assuming portfolio returns of 12% (See Table 1). However, a delayed start is likely to lead to higher outflows to achieve the same target. A 5-year delay almost doubles the monthly saving requirement from Rs 1,555 to Rs 2,861. This more than triples to Rs 5,322 if the start is delayed by 10 years.
Table 1 – Monthly saving for a corpus of Rs 1 cr at 60 years
Age when regular investment begins
|
Final Corpus
|
Return on investment per annum*
|
Monthly saving required
|
25 years
|
Rs 1 cr
|
12%
|
Rs 1,555
|
30 years
|
Rs 1 cr
|
12%
|
Rs 2,861
|
35 year
|
Rs 1 cr
|
12%
|
Rs 5,322
|
40 years
|
Rs 1 cr
|
12%
|
Rs 10,109
|
45 years
|
Rs 1 cr
|
12%
|
Rs 20,017
|
*assuming a mix of equity, gold and debt in the portfolio
Power of compounding
By starting early, you can also benefit from the power of compounding. For example, Rs 1,000 saved every month for 10 years will return Rs 2.30 lakhs (Rs 1.20 lakhs principal) assuming a 12% annualised portfolio return. If this is continued for another 10 years, the total amount accumulated would be Rs 9.89 lakhs (Rs 2.40 lakhs as principal).
By starting early, you can also benefit from the power of compounding. For example, Rs 1,000 saved every month for 10 years will return Rs 2.30 lakhs (Rs 1.20 lakhs principal) assuming a 12% annualised portfolio return. If this is continued for another 10 years, the total amount accumulated would be Rs 9.89 lakhs (Rs 2.40 lakhs as principal).
This may go up further if one increases the monthly saving by 5-10% every year. The above example shows that the second decade has given higher absolute returns (almost 4 times more) than the first because of the power of compounding as even the reinvested amount has generated returns. Thus money grows at a faster rate as time period increases.
Financial planning is the way forward
To spend and save wisely, one can follow a 5-step financial planning process, which can be summarised as
Financial planning is the way forward
To spend and save wisely, one can follow a 5-step financial planning process, which can be summarised as
(1) risk profiling (knowing one’s risk appetite),
(2) analysing goals,
(3) allocating funds across asset classes such as equity, debt and gold,
(4) portfolio selection, and (5) portfolio tracking.
A key component of maximising wealth is asset allocation. So do not put your money only in one asset class, thereby losing the opportunity to benefit from another asset class. When one invests in different asset classes, the risk gets diversified (as all asset classes do not move in the same direction).
Also, do not be worried that to save for the future, you need to sacrifice your current lifestyle and spending. Even a small amount saved in the right manner can ensure big savings over the long run. Mutual funds offer systematic investment plans (SIP) through which you can invest a small amount (as low as Rs 500) to build a corpus. For instance, a saving of Rs 500 monthly for 24 months @10% growth would give around Rs 35,000 at the end of the period. So if you are thinking of buying a costly gadget (say a laptop or an i-pad), a car or a house, you can plan accordingly and save the required sum. With an early start and regular savings you may even be able to buy the dream car or house a few years earlier than anticipated.
Building wealth is a process. By cultivating and practising disciplined investment habits to achieve both near-term and long-term goals, today’s youth can secure their future. Mutual funds provide an ideal platform for youths as these funds can help them invest across asset classes based on their individual risk appetite.
Also, do not be worried that to save for the future, you need to sacrifice your current lifestyle and spending. Even a small amount saved in the right manner can ensure big savings over the long run. Mutual funds offer systematic investment plans (SIP) through which you can invest a small amount (as low as Rs 500) to build a corpus. For instance, a saving of Rs 500 monthly for 24 months @10% growth would give around Rs 35,000 at the end of the period. So if you are thinking of buying a costly gadget (say a laptop or an i-pad), a car or a house, you can plan accordingly and save the required sum. With an early start and regular savings you may even be able to buy the dream car or house a few years earlier than anticipated.
Building wealth is a process. By cultivating and practising disciplined investment habits to achieve both near-term and long-term goals, today’s youth can secure their future. Mutual funds provide an ideal platform for youths as these funds can help them invest across asset classes based on their individual risk appetite.