Managing your personal finance is an art. The earlier you start your money management and investing journey, the better it is for the future.
But why should a young engineering student who is not pursuing finance as his academics understand the need to manage money and the importance of investing?
The answer is, when you start earning, you will surely realise that you need to take care of your finances. And when you will take advice from a Chartered Accountant, he will for once surely rub salt on your wounds by saying, “You should have started early.”
There are two facts which every student must believe firmly:
- Your 20s is the best decade to start investing.
- Compounding is the 8th wonder of the world.
What is compounding?
To understand the value of investing early, one must be aware of what is compounding?
Compounding is the process through which the value of the investment grows exponentially as a result of earning interest on both the principal amount and the accumulated interest.
The term compounding refers to the process by which the initial profits or interest gained on investment become part of the invested money or principle.
Compounding occurs when the returns or interest earned on the principal amount in the first period are added back to the principal amount to compute interest for subsequent periods.
As a result, it enables chain reaction by creating returns on returns for as long as your money is invested in the financial instrument.
The most important aspect of compounding that one must recognize is the importance of the time required. As your returns or interests begin to earn, the profit on your investment begins to grow at a much faster rate.
How can you use the power of compounding to grow your wealth?
Let us have a look at this table to understand the magic of compounding.
10 lakhs invested over periods of 5, 10, 15, 20, 25 and 30 years translates into maturity amounts ranging from 16.1 lakhs after 5 years to 1.745 crores after 30 years period.
The investing lesson we take away from the above example is that someone who saves his/her capital amount for 30 years earns more than 17 times the capital compared to someone who saves for 20 years and earns just 7 times the capital and so on.
Some money managing tips for an Engineering Student
Starting to invest at an early age allows you to take full benefit of the long-term investment perspective. With age on your side, you may take a more aggressive approach to your financial strategy.
Even if something goes wrong, you’ll have ample time to recover and generate big gains thereafter.
As a result, starting to invest early is critical to capitalising on investment possibilities. Till now, one must have understood that managing money is important.
As young adults, engineering students love spending their money on their lifestyles and fulfilling their vanity needs. This is not wrong.
It becomes a matter of concern when they only focus on spending and not on saving a penny. This is a common notion that savings are not something a 20-year-old should care about. And this is where they go wrong.
Individuals who begin investing as teenagers rather than later in life have a significant advantage over their peers, both in terms of prospective profits and knowledge gained from the investment.
With so many alternative investments to pick from, each with a different amount of risk, it can be confusing to know where to begin investing.
Let us go through different options that an Engineering Student as a young adult can invest his money into.
1. Public Provident Fund(PPF)
There are several government schemes in which you may invest. The Public Provident Fund is the most widely used form of government savings (PPF).
It has a 15-year lock-in period and provides annual returns of 7-9 percent. This implies that the money accumulated in a PPF account may only be withdrawn at maturity, which is 15 years after the account was opened.
You can start investing in PPF with a minimum investment of Rs 500 a year. PPF also provides the biggest tax benefits since it belongs under the Exempt-Exempt-Exempt (EEE) tax policy category.
This implies that the money invested in a PPF during a budget year is excluded from an individual’s taxable income for that year.
Furthermore, the interest generated on PPF deposits, as well as the cumulative amount, is tax-free.
2. Mutual Funds
Mutual funds are frequently the most sought-after investment alternative. Mutual fund plans are a basic investment instrument that allows novice investors to pick from a variety of options to build wealth.
Furthermore, given the present market trend, mutual funds are one of the greatest investing options for young and inexperienced investors.
Because there are no one-size-fits-all financial solutions, the earlier you start, the better you’ll learn to handle money.
Mutual funds invest in a plethora of securities, such as stocks and bonds, to allow investors to diversify their investment risk.
As a young investor, you may not only diversify your financial portfolio by investing in many funds, but you can also reduce the total risk of your investment.
In the event of a poor economic crisis, separating your savings into as little as one or two funds will protect your money from a financial collapse.
In addition, if the value of your stock decreases while the value of your bonds grows, it compensates for losses that might otherwise wipe out a complete portfolio in financially challenging times.
Mutual Funds are the best investment option for young individuals since they offer wide market exposure.
3. Index Funds
When most individuals learn how to invest, they hear the word “index fund” a lot. Index funds may be excellent investments for some types of investors, particularly those who are just getting started.
An index fund is a Mutual Fund or Exchange Traded Fund (ETF) that invests in a diverse portfolio of stocks, bonds, and other asset classes. An index fund is directly linked to a market index.
Index funds are popular investment vehicles due to their ease of use and diversification benefits.
A market index is a weighted index of a collection of assets with comparable characteristics, such as being in the same sector, asset class, location, or market size. There are several market indexes.
When you buy an equity index fund, you are purchasing a small portion of each underlying stock. Some of these stocks pay dividends to shareholders.
Each of these firms will eventually pay a dividend to the index fund. The index fund will then pay a quarterly dividend to the fund’s shareholders. This allows investors to earn compound interest.
To conclude, the greatest approach to capitalise on the power of compounding is to begin saving and investing prudently as soon as possible.
“The earlier you begin investing, the larger the effect of compounding will be.”