“Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t, pays it.”
This quote is apt for anyone who decides to choose an investment strategy at an early age. If you are in your early twenties and you have decided to start investing for you future, you are a wise person.
Generally at this age, one is distracted and is lured into spending money on things like sports bikes, smartphones, etc. The worst thing one can do is altogether neglect financial planning.
Financial planning at this age can develop a discipline and can make sure you build a solid corpus for your future. What more? You can be financially free at 45 years or earlier ready to go on a world tour.
Here in this article I will lay out investment strategy for starting financial planning in your 20s.
Lets assume your salary is Rs. 15000
If you are having financial obligations and are still seeking to invest, then I would suggest you to keep amount equal to six months salary saved for some emergencies.
Then, you can proceed with investing at least one thirds of your salary or income. Let us assume that the amount is Rs. 5000.
Out of the Rs. 5000, 20% that is Rs. 1000, invest Rs. 500 in PPF and Rs. 500 in Debt Mutual Funds. Increase percentage of investment in debt funds by one year for each year growth(For example: when 25 years old, invest 25% in Debt Funds.)
You can invest remaining 80% of the Rs. 5000 that is Rs. 4000 in Equity Mutual Funds through Systematic Investment Planning that is SIP.
Every year as your age increases, reduce one percent of investment from Equities, for example when you are 25 years of age, invest 75% in Equity Funds)
Now for how much to invest in Equity funds, here is the breakdown:-
Large Cap Funds:- 25% of Rs. 4000 that is Rs. 1000
Multi Cap Funds:- 35% of Rs. 4000 that is Rs. 1400
Small Cap Funds:- 40% of Rs. 4000 that is Rs. 1600
Remember that you must never stop SIPs even though the market has downs. Aim for long term.
Assuming that you continue with your SIPs, you will have Rs. 3.3 Lakhs after 5 Years, 9.3 Lakhs after 10 Years, 40 lakhs in 20 years and 1.4 Crore in 30 Years and 2.6 Crores in 35 Years assuming 12% interest. I have assumed only 12 percent interest. Historically, it has been more than that.
Total amount invested in 35 Years will be Rs. 16,80,000 and wealth gain will be Rs. 2.43 Crores.
|5 years||4000||3.3 Lakhs|
|8 years||4000||6.5 Lakhs|
|10 years||4000||9.3 Lakhs|
|12 years||4000||12.9 Lakhs|
|15 years||4000||20.2 Lakhs|
|18 years||4000||30.6 Lakhs|
|20 years||4000||40 Lakhs|
|22 years||4000||51.8 Lakhs|
|25 years||4000||75.9 Lakhs|
|28 years||4000||1.1 Crores|
|30 years||4000||1.4 Crores|
|35 years||4000||2.6 Crores|
POWER OF COMPOUNDING
You can see the power of compounding where you will generate wealth of 1.4 Crores in 30 Years and 2.6 Crores in 35 Years. Just by keeping your SIPs intact for another 5 Years, you will make a 1.2 Crore in the 5 Years. The key is to be Patient.
Also I did not even take the other factors into account like Salary increase. With increase in salary or business income, you must increase investments.
Above all, Always remember that ‘Income minus Investments is equal to savings’ must be your formula.
For a young person in the early 20s its necessary to not be distracted with the market downs which you see initially in your portfolio. Make sure to maintain investment discipline and follow the investment strategy for a better future.