Safe investment principles – starting young:

Many investment experts opine that starting young (investing at an early age) is an ideal way of safe investment, and you can assure yourself of good returns later in life. Some of the benefits of investing early are as follows:

• Safe investment at an early age offers better returns:

One of the major advantages of safe investing in an early age is that your investment will have a longer duration to grow and so, you’ll get more returns.  For instance, if you invest $10,000 at 25 years of age, your investment will generate considerably greater earnings by the time you retire. On the other hand, if you invest the same amount at 35, you will get much less returns.

• Safe investments at an early age betters the spending habits:

This benefit of an early start in investments is overlooked by many people. Investing at an early age will inculcate positive spending habits in you, and this will help you immensely in the long run. As you will forward the excess income for saving and not for spending you will become a more conscious consumer and as a result more prudent in your financial decisions, which will lead you to prosperity in a later age.

• Safe investments at an early age offers a better quality of life:

You can have a better quality of life by investing at a young age. By investing early in things such as retirement accounts or IRAs, you won’t have to worry about financial status post retirement. Due to this, your quality of life before and after retirement will be much better, as your financial condition will be stable, and so, there won’t be any kind of stress involved concerning finance options.

• Safe investments at an early age offers compounding benefits:

When you invest in a particular bank or any other financial institution, it adds a certain amount of interest to your savings at specified time intervals (for instance- one month). If you don’t collect the interest and allow it to add to your lump sum, you can start earning interests not only on the principal amount but also on the accumulated interest of the prior periods.

A compound interest can be computed daily, monthly, quarterly, semiannually, or annually. Remember, the longer you leave your investment with a financial institution, the more effective your compound interest will be.

 

The power of compounding:

The power of compound interest is one of the strongest powers in the universe and should be explained thoroughly. For instance, consider the following example:

John, a 22-year guy, invested $10,000, paying 5% per annum for 15-year fixed interest. John has the choice of either re-investing the interest back into the fund or having the annual interest income of $500 paid into the savings account.

Now, if John chooses the first option of re-investing the interest, after 15 years the total interest credited will be $10,789 (see the table below for the accurate calculation). If he chooses the latter option, after 15 years, the total interest credited will be only $7,500 ($500*15 years). Thus with the first option, the total amount he’ll receive after 15 years will be $10,000 + $10,789 = $20,789, whereas with the second option he’ll receive just $10,000 + $7, 500 = $17,500. This represents a difference of almost 20% in the accumulated sums.

Of course that if the interest rate is higher and/or the time period is longer the compounding effect will become much more prominent.

Year	Accumulated Investment ($)	Interest Rate	Interest ($)
1	10,000	5%	500
2	10,500	5%	525
3	11,025	5%	551
4	11,576	5%	579
5	12,155	5%	608
6	12,763	5%	638
7	13,401	5%	670
8	14,071	5%	704
9	14,775	5%	739
10	15,513	5%	776
11	16,289	5%	814
12	17,103	5%	855
13	17,959	5%	898
14	18,856	5%	943
15	19,799	5%	990
Total	20,789		10,789

 

It is now clear that the longer your investment remains in the bank (or in the market), the more compounding of interests will occur and the better returns you’ll get.

Thus, safe investment at an early age, with compound interest, can increase your savings many times to offer you better returns. This example is also relevant in the stock market as the average yield of the stock market ranges between 7% – 10% annually. The longer time the investment remains in the market the larger the compounding effect (just like a snowball gaining more and more momentum).

To summarize remember that the real safe investment greatly depends on the age that you have started to save – the sooner you begin saving, the better returns you’ll have.