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Slow and steady wins the investment race

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SummaryBankBazaar.com CEO Adhil Shetty on why it makes sense to start investing early for a secure retirement

Investing for your retirement may not be the most important thing on your mind when you start your career. For most people, investing may not even be on the priority list when they start their career. When you start your career, your saving capacity may not be much in absolute terms, as your salary itself may not be much. But this should not deter you from making investments. This is because the first few years of your earning life have a huge impact on your future finances.

As with anything else in life, an early start is key to investment. The earlier you do your retirement planning, the greater will be your return on investment. There are more reasons than one for you to start investing early in your career.

Compounding effect

The most important reason to start investing early is to get the benefit of compounding. Compound interest works magic for any investor. As you know, compound interest means the interest earned on interest. If you continuously reinvest your earnings, your return on investment will increase exponentially.

When you regularly invest from the start of your career, you are increasing the return you receive on your returns. A monthly investment of as low as R1,000 or R2,000 will have a large impact on your financial position. Let’s understand the effect with a few examples:

Example 1: X is 25 years old and has 35 years left for retirement. He starts investing R1,000 per month for 35 years at a return of 12% per annum. The corpus left with X at the end of 35 years will be R64 lakh.

Y is 30 years old and has only 30 years left for retirement. He also starts to invest R1,000 per month. But as he has started investing late in his career, he can invest this amount only for the next 30 years at 12% per annum. The corpus left with Y at the end of 30 years will be R35 lakh. This is the difference five years of investment have made to the final corpus value. If Y needs the same R64 lakh for his retirement, he will need to shell out R1,830 per month.

Example 2: Both X and Y are 30 years old and have 30 years left for retirement. Now, X invests R2,000 every month for the first 15 years at a return of 12% per annum. He invests a total of R3.6 lakh.

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