Normally, we only start to earn money in our 20's.
Until then, we were reliant on our parents/guardians for money, and suddenly, we gain a sort of freedom.
Because we start earning our own salary, we will start to enjoy our lives to the fullest.
However, if we do certain things in our 20's, it will be of great help in our future.
What are those things, and how do we do them? We will cover that in this episode. Hi, my name is Vijay Mohan, and you are watching Investment Insights.
When it comes to investing, the first thing we need to understand is the power of compounding.
How will the investments we have today grow in 10 years? 20 years? 50 years? We should know that.
Only if we know that, we will have the motivation to invest today instead of putting it off for later in our lives.
If I earn 1,000 rupees today, and it grows at a rate of 10%, in 50 years, it would have become 1,17000 rupees. If that same 1000 rupees grew at a rate of 15%, in 50 years, it would have grown over 10 lakhs.
If we are able to know the growth potential of our money, then we will think twice before buying a fancy phone or a fancy bike.
I am not telling you to not get those fancy things. Just saying, know what you are compromising for the future, and make an informed decision.
I just don't want you to look back and feel like you missed out on an important opportunity because you didn't know about it.
The next thing that we need to understand are the differences between investing that 1000 rupees at the age of 25 than investing it at the age of 45.
If we invested 1000 rupees when we were 25, and it grew at 12%, then when we are 45, it would have become around 10,000 rupees.
What does that mean? It means that if we are to invest at 45 instead of 25, then we will need to invest 10 times as much to get the same amount for retirement.
Instead of 1,000 rupees, we will have to save 10,000 rupees.
If you put off retirement savings for later, then in the future, you will have to save many times what you could save now.
So make the choice between saving 1,000 today or saving 10,000 at 45.
We can look at this another way: the money that we earn in our 20's has the maximum runway to grow.
Let's say we want to retire at 60. Then our money will have 35 years to grow when are at 25.
If we have a 12% return, then our 1,000 rupees would have grown to around 53,000 rupees.
However, if we invest it at the age of 40, then it only has 20 years to grow.
That same amount of money would only turn into 10,000 rupees; 5 times less than if we had invested it earlier.
So what can we learn from this? The best time to save for retirement is in our 20's.
So, in your 20's, we have to look to earn and invest as much money as possible.
As we saw in our "Building Wealth" series, at this age, we have almost no responsibilities, so we have the maximum opportunity to save in this period.
We can live with room mates, have a cheap bike, or use public transport.
There are so many opportunities to save in this period, but it is our choice whether to take advantage of them or not. However, I'm not telling you to be miserly; I'm just telling you to reasonably save the most you can.
Now we know how important it is to invest and save during our 20's. But where do we invest?
What assets are in the market that we can invest in? What are their return potentials? What are their risks? We should know that.
If you do not know about this, then you can check out this channel's "Asset Allocation" episode. You'll get a rough idea. Based on that, you can choose where you want to invest in.
A big advantage of investing in your 20's is that time is on your side.
The optimal time for investing for the long term is in this period. Because of that, you can take maximum risks.
If the market is unstable, you can give it the time it needs to recover, because you would have around 30 years until retirement.
By "Maximum risk", don't put all your money in crypto; but putting 100% equity, or in the stock market, is good.
Some of you might scream, "Stock market! That's gambling!".
Most people use it as gambling, that's true, but what I am saying is not that.
You can invest all of your money in index funds, and this itself will give you more than enough equity exposure.
We have already looked at index funds and its risks in detail in other episodes on this channel. You don't need anything fancier than that.
If equity exposure seems risky to you, then you can invest in other assets that are more at your risk level. It can be real estate, gold, etc. Your money just needs to grow.
If one side of the spectrum is people who think the stock market is gambling, there are people on the other side too, who think that they can handle all the risks.
They get very involved in the market, doing day trading, ForEx trading, options trading, etc. If you ask them, they say, YOLO- you only live once.
But you live everyday; death only happens once and then it's over.
As difficult it is for old people to understand technology, it is difficult for young people to understand risk.
People who are daredevils in the stock market in their 20's soon learn that their stunts are useless and get them no where.
It is much better to learn the hard way in your 20's with a small amount of money than to lose all your money that you save in your 40's doing the same thing.
In our lives, there is nothing that teaches better than our own experiences.
The next thing that we need to understand is that savings rate is more important than investment returns in your 20's.
We have already covered this in another episode. Let's say that we earn 5 lakhs per year.
If we have a 10% savings rate, then we save 50,000 rupees.
If that 50,000 rupees grows at 20%, then we will only have a growth of 10,000 rupees.
Instead of this, if we save and invest, 50% of our earnings, it would be 2.5 lakhs.
Even if it gives just 10% return, the growth would be 25,000 rupees.
During our initial period of investments, the contribution from our savings rate to our net worth is high.
So in our 20's, it is easier to increase our net worth by increasing the savings rate that is under our control rather than chasing high returns that is not under our control.
Its impact to net worth is high as well. We should remember that.
Then have a financial plan based on your goals.
Set personal goals like, I will buy a car when my net worth reaches 25 lakhs, I will buy a home when my net worth reaches 50 lakhs.
The 25 lakhs and 50 lakhs I say here is for an example.
That can be different for different folks. So set your own life style upgrade goals depending on your own comfort level.
As we saw in "Building Wealth" series, our financial growth will be as aggressive as the longer we postpone any life style upgrades.
Remember that while you are planning your life style upgrades.
That is all you need to be aware of on finance when you are in 20's.
Other than these, we can do few other things in our 20's that make the rest of our life easier.
We reviewed compounding right? It is not applicable just for the money we invest, it is also applicable for the knowledge and skills that we develop.
So learn in depth about things that you like.
It could be Finance, Photography, Technology etc. If you are interested in a subject, invest your time to develop strong knowledge or skills on that.
Without you even realizing, you would have become an expert on that subject over time.
Try to travel a lot. When I say travel, I do not mean going around locally.
We should travel to places where we are not familiar with the local culture.
The reason I say that is because, as much proud as we are about our own culture, we should learn to appreciate other cultures as well.
If we are running around the same bush, we will not get that kind of maturity.
Then your job. You should like it. It should also pay you reasonably well.
If you are not satisfied with your job, look for ones that you like.
Develop the skills and knowledge required for that and try to switch.
20's is the best time to do any career switch. It becomes very difficult in 30's.
Even if you have to invest 1 or 2 years for that career switch, it's OK. It's worth it.
If you believe in yourself, make that bold move.
What else would be beneficial if we know in our 20's?
Experienced folks - please share in the comments below.
We will soon meet again in another episode. Thank You.