Why it pays to start saving now

Investing early may start with a small step, but if taken at the right time, it could be a giant leap for a healthy financial future, says Class 11 student Anuj Shah who is passionate about investing

Early to bed, Early to Rise" has been a tried and tested formula for good health. However, for good financial health, the mantra is "Start Early, Live Better". At my age, not many people think of protecting one's future and shielding one's retirement from uncertainties. We do not feel the need to save in the present, as there is still a long time to go before we become independent and eventually retire. However, we are simply mistaken.

We do not realise that managing money is much easier when you are young. As we grow old, with a growth in earnings, the expenses also grow manyfold due to increasing responsibilities. As it gets difficult to control expenses in later stages, it also gets difficult to enhance one's savings quotient then.

The early you start investing, bigger the corpus you may have at the time of retirement. For example, if you start investing Rs 10,000 every month for your retirement at the age of 25, your retirement corpus shall be Rs 6.50 crore while if the savings start at the age of 35, the retirement corpus shall be only Rs 1.90 crore at the age of 60.

Just delaying your investments for the first five years can cost you around Rs 3 crore. Further, a delay of five years in investing makes you lose an opportunity to almost double your investment corpus. This is certainly not something to be ignored. You must also notice that if you start early, at the age of 25, your initial investment is just six per cent of the retirement corpus. This goes to as high as 36 per cent in case you start investing at the age of 45, and even with a much smaller retirement corpus.

Even when the amount being invested in each period remains same, the amount of return increases with longer investment period. This is precisely the power of compounding, which in simpler terms refers to the process of generating returns on the reinvested interest amount.

Just to help you understand better about the power of compounding, let's put out the same data in a different manner. If you wish to have a retirement corpus of Rs 6.50 crore at the age of 60, you just need to invest Rs 10,000 monthly starting at the age of 25. However, in case you start investing at a later date, you need to invest a higher amount on a monthly basis to compensate for your delay.

Starting early also helps to inculcate financial discipline. One must start investing in a diversified portfolio consistently over a period, without worrying about timing the market. In the long run, market timing does not matter, as investing regularly averages out the cost of investment. In fact, capital markets are known to fetch positive returns over longer tenures.

To invest regularly, it is suitable to rely on tools like Systematic Investment Plan (SIP). Simply put, SIP is an investment tool which facilitates investing fixed sum of money on a regular basis in a Mutual Fund. If not for such a tool, at the back of mind, the investment plan could get postponed endlessly as one waits for that supposed fall in markets.

One should focus on 'time in the market'. By assigning time to your goals, you are no longer affected by daily price movements. It might be true that majority of appreciation in your investments happen over very few days in the year but by allowing a longer time to your investments, you also allow them to be a part of that rally.

An amount of Rs 10,000 invested in BSE Sensex in 1979 would have added to your wealth by Rs 29.40 lakh today, giving a return of 294 times in a period of just 39 years. That's the power of staying invested in equities and reaping the benefits of compounding.

Therefore, one must ideally start investing right from the start of the earning stage, and SIPs could be the first investment option to which a part of one's monthly income should be allocated. These small investments do not make much difference in the short run but certainly add much more fat to one's corpus eventually.

Further, with each increase in income, the SIP amount should increase in the same proportion as an ideal long-term wealth creation strategy. In case the SIP amount is kept constant, the ratio of the amount saved to the amount earned decreases with each increase in income.

SIP top-ups take care of such situations. It is a facility offered by fund houses to periodically increase the SIP amount. With a regular increase through SIP top-ups, the proportion of savings as a percentage of total income can be maintained and indeed enhanced. Top-up facility enhances the investment in the corpus and helps you achieve your dreams faster.