How many times do we see people sharing their first choice of investment when they were barely 20 years old? With Warren Buffett admitting how he bought his first stock when he was 11 years old, many people have queued up on social media platforms gloating how their early investment choices had helped them buy a house without taking a home loan or how many of them are pursuing hobbies post achievement of their financial goals. While this may seem quite inspiring at the outset, it leaves many people thinking if they will have saved enough before turning 40.
It is a common itch among young people to keep postponing their savings and investments till they reach 40. Assume that they had started working at the age of 25 years. This means that they had been working for around 15 years during which they had neither saved nor invested. This is also common among many who may have been working in high-profile jobs and earning good salaries.
Justifying late investments
Most people plan investments hoping that the compounding effect will help grow their earnings. This explains why most personal finance experts advise you to start investing early in life and ensure that you park the money in your investments for a considerably long period. However, this does not mean that all is lost for those starting their investment journey at the age of 40 years.
People in their 40s have the advantage of earning a higher salary, which means that they can allocate a greater chunk of their income to savings and investments. With a higher investible surplus left, these people still stand to gain from long-term compounding if they continue to invest for another 15-20 years.
Apart, many people prefer to buy a home early in their career, which means that they have either repaid their home loans or are nearing their loan repayment schedule. This translates to lesser debt, thus, leaving more money with them to invest in various options depending on their financial goals and risk appetite.
Focus more on savings
Wealth creation should be a step-by-step process. After all, you are not planning to move mountains in a day. This is important for most investors who focus on gaining higher returns by parking their money in extremely risky financial instruments. No matter how late you have joined the investment bandwagon, you must prioritize savings over investments.
Remember “To save is more important than to invest”. This motto may seem contradictory to the popular opinion but is true.
Look at equities
A 40-year-old investor would definitely have saved up something in his or her Employees’ Provident Fund (EPF) account. The current interest rate is 8.1 per cent, which is much more than what is offered on most other debt funds and fixed-income instruments. With quite a lot of money invested in debt, investors can now consider allocating the remaining part of their savings to equities.
If you are new to the world of investing, do not decide your choice of funds based on their last six months’ returns alone. Past performance is no guarantee of future results. Obviously, the market conditions in the past cannot be the deciding base for the future. To start with, put your money in large-cap funds and index funds. Choose a large-cap fund with a low expense ratio and that has performed consistently over the past five years or since inception. To choose among the various index funds listed, look at their expense ratios and how well they have earned returns in sync with the stock market in the past.
Increase your SIPs
One cannot forget the decreasing value of money that only causes our investments to lose their value over a period. Investing with the idea of saving a corpus of at least ₹1 crore in the future will make no sense as it may not be enough to cover one’s expenses then.
To mar the effect of inflation on your savings and investments, take care to add to your regular investments periodically. You will be gaining on your income through appraisals and bonuses each year. You can use the extra money to top up your investments by adding to your systematic investment plans (SIPs). Over a period, you will be surprised at how much you have accumulated and gained over the period.
Seek professional help
Just because you are a noob at investing does not mean that you cannot plan your way to earn the much-needed corpus. Investing directly, when young, involves a lot of risks. However, continued risk-taking tendency may backfire owing to a lack of knowledge or understanding of how your investments work in your favour to earn money. Instead of struggling to sort out your finances, it would be worthwhile to seek the services of a professional personal finance manager who would help you make your investment decisions.