HOW TO INVEST IN YOUR EARLY 20s

Step 1: What to focus on, before starting to invest?

Step 2: How to decide the investment amount?

Step 3: How does compounding affect our investment?

Step 4: Which assets to invest in, Stocks, Gold, Bitcoin, or Real Estate?

Step 5: How to Invest in the market?

                                 

#1 THINGS TO DO BEFORE INVESTING FOR BEGINNERS

Number 1, the best time to start financial investing is in your 20s.

why?

Because you have time. You have the most precious thing when it comes to investing, and that is time.

Because the amount you invest is not as important as the duration for which you are investing. that is why you should start your investing journey as soon as possible. 

you start investing in insurance.

There are many unprecedented things that can happen in a life for which we can never plan, and insurance provides protection against that.

2 KINDS OF INSURANCE RECOMMENDED

There are two kinds of insurance so that before starting any kind of these two products and secure your protection.

INSURANCE #1
HEALTH INSURANCE

Health Insurance, It is absolutely important to have Health Insurance for yourself and your family. Last year because of covid-19, a lot of families had huge medical expenses, they could not even bear their daily expenses, their education fees, So on and so forth, and that's when health insurance is useful. So please buy one for your family and yourself.

The important things to note in it are, to buy separate insurance for your parents, and buy separate insurance for your family if you are already married.

Why?

Because if you include your parents then your insurance will be expensive. The insurance premium is based on the age of the oldest member. So if you buy joint insurance then the premium will be determined based on the age of your parents which will be higher, which will not be the right thing to do.

Plus the Health Insurance requirements of parents are also different.

INSURANCE #2
LIFE INSURANCE

The insurance is life insurance. If you are the sole earner everybody is dependent on your income, then your life is very important, not just for your own self, but also for your family.

God forbid, something happens to you, if you have an untimely death, or a disability because of which you are not able to work further, or you ailing from a fatal disease, then you need to protect yourself against that, and that is why Life insurance

YOUNGER YOU ARE, LOWER YOUR PREMIUM

It is better to buy Life insurance as soon as possible because your premium would be lesser.

When you are young, in your 20s, then the possibility or the probability of hospitalization is very less, that is why the premium is also very less.

INSURANCE COVER: 25X ANNUAL INCOME

Ballpark amount, your insurance cover should be 20-25 times of your annual income.

This means, suppose your annual income is 5 lakh rupees then you should take a cover of 1-1.25 crores rupees, which means if you have an untimely death, or disability, or a disease, then your family will receive a lump sum amount, which will then protect them for there life, and you would want it to be for 20-25 years of your income.

This is why insurance before you start any investment product.

#2 HOW MUCH AMOUNT TO INVEST?

How do you determine what should be the minimum investment?

50:30:20 RULE OF INVESTING

For that, there is something called the 50:30:20 rule.

That means, if your take-home is 100 rupees per month then you will use 50 rupees towards your needs.

It could be your EMI, rent, your water and electricity bill, your food, your transportation, all the things important for your daily life, these are not your desire or your wants, they will be separate, these are your needs, necessity is which are extremely important.

And then 30% goes towards your wants or desire.

This is a great way to think about life, because if you invest all your money, and then you have a lot of money in your old age, then how would you enjoy your youth?

That is why why it is important to balance it out.

You are enjoying while you live your life, utilize your money properly, and gain experiences, Plus you are also investing, and that is why the 50: 30:20 rule is so powerful.

So 50% towards your needs, 30% towards your wants, and the remaining 20%, that is the minimum investment that you have to make every single month.

50:30:20
IF MONTHLY INCOME - 100
NEEDS - 50
WANTS - 30
INVESTMENTS - 20

So from 100 rupees, 50 rupees towards your needs, 30 rupees goes towards your wants, and 20 rupees onwards your investments.

Every year as your income increases, then don't divide the increment amount in the ratio of 50:30:20 again, because what you want is to limit your needs, your wants to remain the same, and to increase your investments.

If they are always only 20%, then there is a possibility that it would not be a huge amount or enough for you to have a secure future.

The increment that you get in a year, reverse the ratio for that.

This means, if your salary is 100 rupees and this year you got any increment of 10%, then your salary from the next year would be 110 rupees, so you have rupees 10 extra.

Then don't distribute these 10 rupees in the ratio of 50:30:20, in terms of needs, wants, and investments.

Instead, reverse it.

Put 50% into your investments, 30% for wants, and 20% for your needs.

This means, out of 10 rupees, invest 5 rupees, keep the 3 rupees for your wants, and only 2 rupees for your needs.

This will reduce your needs, you will get habitual to limiting your needs.

30% goes towards wants, so there is no change, there you want to go for a vacation, buy a phone, buy a car, all those things will happen comfortably.

And you are investing 50% of your increment towards your investments, and that is a wise way of looking at that.

#3 UNDERSTANDING THE CONCEPT OF COMPOUNDING

Compounding is the earth wonder of the world and this is something which if you understand you will get the power of investing.

You can see compounding not just in money but in every aspect of life.

Compounding can be visible in your relationship, in your learning, in your knowledge, everything is a factor of how much are you investing and how much are you going every day, every week, every month, and every year.

Here is a simple way of thinking about compounding.

If you get a return of 10% on 100 rupees, then your money increases from 100 rupees to 110 rupees, which means it increased by 10 rupees.

The human mind thinks linearly, that as the money grows, every year there will be an increment of rupees 10, so 100 will be 110 and then 120, then 130, then 140 so on and so forth.

Compounding doesn't work like this.

If your money keeps increasing by 10% every year, then rupees 100 will become 110 in the first year.

In the second year, 110 rupees will become 121 rupees, which means your money grew by 11 rupees instant of 10 rupees.

Now if you get a 10% return on these 121 rupees, then your money will grow by 12.1 rupees instead of 11 rupees.

This means every year with the same return my money will increase faster and more, this is compounding.

Compounding is the rate of return on the increased pace that you already have.

There is a rate of return on your total base, like 100, 110,121.

How does this work in investing 

Compounding means if your money keeps growing year on year, then over a really long period of time, you will keep getting use increments every year, that it will take care of virtually everything.

For example,

If you start investing with 500 rupees every month from the age of 20 till 65 and increase it by 5% every year, and the inflation is at 5%, is it grows at a return of 15%, then at age of 65, the amount in your bank will be ₹4,70,00,000!

Starting with an investment of 500 rupees!

Suppose if these 500 would grow at a rate of 20% instead of 15% if you somehow get a return of 20% instead of 15% every year, then how much money would your money instead of 4,70,00,000.

You maybe think that it is only increased from 15% to 20%, so what use difference will it make to 4,70,00,000?!

The answer is ₹30 crores!

I know you must be aghast, and you just can't believe it, but if you start with investing rupees 500 every month and grow it by 5% every year with the return of 20%, then from the age of 20 till the age of 65, then you will get 30 crores in your bank.

If the inflation will be 5%, then the value of those 30 crores today would be 4,60,00,000.

That's the power of compounding.

A slide change from 15% to 20%, it moves all this way!

If you get a return of 5% on FD, then it's not 15%, not 20%, it's 5%.

If you take an FD at 5%, then how much money would be the value of those 500 at the age of 65?..... ₹24 lakhs!

What?

24 lakhs, my friend!

Your 500 rupees would increase to 24 lakhs,

Which would actually be 9.5 lakhs because of inflation, which means in today's term will be getting only 9.5 lakh which you would have made in 45 years with an investment of 500 rupees every month.

That is why compounding!

There is so much difference between 5%, 15%, 20%, and it changes the game entirely, that is what you need to focus upon, that is what you have to realize is the power of compounding.

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