Starting your financial journey early gives you a head start in achieving your long-term financial goals by capitalizing on the power of compounding returns and allowing small investments to grow significantly over time. Early financial planning also helps you cultivate good financial habits which provides a safety net for unexpected events. Additionally, starting early provides flexibility to adjust your investments as life circumstances change. Ultimately, an early start means greater financial control of your prosperous future. With a proactive approach, you minimize rushed decisions, stay on track toward financial goals, and enjoy greater peace of mind, knowing that your financial future is well-planned.
Financial planning is essential for a secure and stable future; it’s not just an option but a necessity. While many people recognize its importance, they may not understand the value of starting early. Beginning financial planning sooner provides greater control over your future and offers immense benefits that can significantly contribute to achieving financial freedom.
Financial planning is a proactive approach to creating a clear and achievable roadmap for reaching your financial goals throughout your investment journey. It empowers you to craft tailored investment strategies for each financial objective through disciplined saving, smart investing, and effective estate planning. A comprehensive financial plan considers important factors like income, expenses, assets, liabilities, and risk tolerance while equipping you to handle unexpected events. These steps allow you to confidently navigate your financial future and work towards long-term stability and success.
Here are the benefits of taking up this all-important exercise early in life.
Savings and budgeting are vital tools in your arsenal that can help you accomplish goals and easily navigate choppy waters. As a young adult, you may not have many responsibilities to meet. However, as you advance in your career and life, responsibilities will come your way. Marriage and having kids are the common ones most of us are likely to encounter in our lives.
Starting financial planning by imbibing the habit of savings and budgeting can help you meet financial goals easily. While budgeting enables you to prioritize spending and keep discretionary expenses on the back burner, savings hold you in good stead during rainy days. By adopting these practices, you’ll be well-equipped to face the future with confidence and resilience.
While risk tolerance differs across individuals, you tend to have a higher risk appetite when you are young. As you age, your risk tolerance comes down. Early financial planning allows you to have an aggressive outlook and invest in relatively riskier asset classes like equities. Investment in equities is needed to gain inflation-beating returns in the long run, which is significant in accomplishing long-term goals like retirement.
An early start also allows your equity investment to ride the market’s ups and downs more effectively compared to the short period. In other words, you can better navigate market volatility and ride out fluctuations.
Albert Einstein famously dubbed it the world’s eighth wonder for good reason: the power of compounding.
This concept is summed up in the formula: Principal × (1 + Rate of Return) ^ Number of Months/Years (Time). It teaches important lessons to investors. Among the three key variables—principal, rate of return, and time—only the principal amount and the time are within an investor’s control. While returns can be estimated, they ultimately lie outside direct control. Ironically, many investors often find themselves fixated on chasing returns instead of giving priority to principal and time. If this focus were shifted, the chances of achieving investment success could improve significantly.
Compounding accelerates wealth creation, and starting early gives you the time required to harness the power of compounding. Let’s see how. Suppose you are 25 and start investing ₹ 5,000 per month in a mutual fund through SIP, offering a return of 10% p.a. for 35 years. At 60, the value of your corpus will be approximately ₹1.90 crore.
If you delay your plan and start investing at 30, the corpus drops to ₹1.13 crore. A delay of 5 years reduces it to ₹66.34 lakhs. Early financial planning and subsequent investments are essential to accumulate funds for long-term goals like retirement through compounding.
You may not want to sacrifice a goal simply because you didn’t plan it early. Yet there are many instances in life where we have made such sacrifices simply because we didn’t have the right amount of money at the right time. Kickstarting your financial planning early can help avoid the cost of delay. The cost of delay is the additional amount of money you need to pay when you delay or postpone your investments. Let’s understand it with an example.
Suppose you want to accumulate ₹1 crore as your retirement corpus. You are 25 now and wish to hang up your boots by the time you turn 60. To accomplish this corpus, you plan to invest via mutual fund SIPs. If you plan early and start investment at 25, a modest monthly SIP amount of a little over ₹2,600 in a fund offering a return of 10% p.a. for 35 years can help you accumulate the corpus.
If you delay your investments by 5 years, the monthly SIP amount jumps to over ₹4,400. A delay of 10 years pushes up this amount to over ₹7,500. As is evident, every delay adds to the cost of investment, ultimately putting strain on your finances.
Unexpected life events such as a job loss or a medical contingency may warrant a shift in your financial priorities. Similarly, it’s natural for markets to rise and fall, and your earnings may fluctuate.
An early start gives you more time to assess your goals, track progress, and tweak your strategies if needed. It ensures you are not caught off guard in the event of these changes. It gives you the flexibility to modify your savings, investment allocations, and even your budget to ensure you are on track to achieving your goals. Whether rejigging your investments during a market downturn or increasing your savings with extra financial responsibilities, early planning gives you the control and the foresight required to adapt.
Remember the email you receive from HR every January or February asking for investment proof for tax planning? Many of us tend to make tax-saving investment decisions only after receiving this email, often in a rush, without considering whether these choices align with our financial goals. As a result, these investment decisions frequently fall short of meeting our expectations. By the time we recognize our mistakes, it can be too late. We may end up investing in products that do not align with our goals or that require long-term commitments.
However, financial planning helps mitigate the risk of rushed decisions and getting caught in the wrong product. For instance, when you start tax planning at the beginning of the financial year, you can figure out which tax-saving instruments serve your purpose better. With the luxury of time, you can better analyse where and how much to invest.
Debt has become an integral part of our lives. That said, not all forms of debt are bad. Debt taken to learn a new skill that can give you a kicker in your career or higher education is a good debt. That said, even this debt needs to be paid on time, failing which can hurt your credit score. However, with proper financial planning, you can minimise debt and keep the bad ones at bay. Not only can you plan for big-ticket expenses but also reduce your reliance on loans. Also, you get ample time to focus on debt repayment strategies to help you pay your debts on time. This enables you to become debt-free soon.
Human beings are prone to mistakes. All of us make it at some point or other in our lives. What’s important is to learn from them and ensure not to repeat them. Early financial planning allows you to rectify your wrongs if you happen to make them.
Be it overspending, recurring debt, or flawed investment choices, being an early bird helps you course correct before things spiral out of control. The period of correction ensures that temporary errors don’t derail your larger objectives.
Early financial planning offers an invaluable benefit: peace of mind. When you have a clear and detailed roadmap for your financial future, you can tackle challenges with confidence and ease. This proactive approach not only alleviates anxiety and stress but also empowers you to navigate life’s hurdles with assurance. You’re not just prepared; you’re in control of your financial destiny.
Whether leveraging the power of compounding, developing the habits of savings, minimising debt, or making the necessary tweaks and adjustments, early planning helps you stay ahead. Remember, it’s never too early to begin, but delaying can come with a cost. So, take charge of your financial future today and lay the groundwork for a prosperous life.
