May. 25 By Meenakshi Nawani
Recently, I had a chance to meet a few women in their early 20’s; who have started working and are enjoying their newfound financial independence.
I asked them – if you had some extra money on hand, what would you do with it? Most of them said they would ‘save’ for short-term goals e.g. like buying a branded item, for a holiday or a car. I did not find any responses which included investing the extra dough in the stock market. Having learnt a few life lessons myself, I would like to say to my younger brethren, how vital it is to understand the positive impact of not just saving but also investing those savings early on in life.
Everyone’s situation is different in terms of income, expenses, location, risk tolerance and goals however the one thing in favor of young women is age! Here’s where you should make compound interest your best buddy because it works wonders over a long period of time.
Another question that came up was was – when do you plan to start saving for retirement? The most common response was- ‘I will think about it after some time’. I was curious – Why not now? Sure, it sounds reasonable to start ‘tomorrow’, however since when were you, the Millennial woman, settling for ‘reasonable’ standards. As the wise men say – change is the only constant in life. And life is full of surprises. So, my request to you is- STOP! Don’t procrastinate, start now!
One of the key steps to building a good retirement plan is to budget your spending. Make a simple spreadsheet and list your income & expenses. Aim to spend less than you earn and invest the difference. If you do this consistently, the chance of achieving sound financial independence early increases significantly.
Saving for retirement as soon as possible is a simple concept in theory and needs practice, however job market, health or personal situations can make it complicated. Nonetheless, the effects of compounding return over several decades is amazing. Let’s take a basic example: Say you invest $10,000 in a long-term bond that earns 3% interest per year. At the end of the first year, your investment will grow by $300 (3% of $10,000). You now have $10,300. Then, the next year you’ll gain 3% of $10,300, which means your investment will further grow by $309.00. A little more, right! Fast-forward to the 40th year and your investment due to the magic of compounding becomes $32,620.40. This is how the concept of compounding earnings on earnings works from the first dollar saved to grow future dollars. The math shows the benefits of compounding returns over a greater period of time are significant. The results are even more evident if you start early and keep a consistent pace
The savings might be even more dramatic if you invest the money in a stock market fund or other higher earning vehicle. Furthermore, stocks are relatively liquid. They may even be reallocated into a retirement account – tax-free – until you start to withdraw the money. Statistics show that stocks normally do considerably better than real estate or bonds over long windows of time. It’s important to note that stock market returns are not guaranteed and certainly come with a lot more volatility along with a risk of losing initial capital. At a younger age though, you could have a higher capacity to take some calculated risks.
For more information on compounding, check out https://www.investopedia.com/university/beginner/beginner2.asp.
So, my dear millennial women, I want to nudge you past any mental barriers that keep you from investing. Start small but start early! Let time be your friend in this journey.