People learned a lot of things during 2020. Firstly, they learnt that the income from full-time employment might not be enough for the sustenance of life. Secondly, it is very important to formulate a financial retirement plan. A financial plan can help you with acquiring wealth for expenditures after retirement. However, you may be wondering why to formulate a plan to acquire wealth for future expenses. The answer lies in inflation. If you were to follow the inflation trends today, you will find out that your savings may not stand up to the inflation of tomorrow. Apart from the one mentioned above, there are several other reasons. But before going into the reasons, let’s look at what financial planning is.
Financial planning can be defined as the process in which you formulate a budget to achieve your financial goals after looking at your current financial situation. In simple words, a financial plan is a strategy that lists out the expected future expenditures. It will consist of both necessary and unnecessary expenses. While you cannot avoid necessary expenditures, you can attempt to avoid unnecessary ones.
Now that you know what financial planning is, listed below are some of the reasons why you need to start saving a portion of your income early in your 20s, i.e., the time when you enter the job market:
- So that you are not dependent on anybody after retiring:
One of the first reasons why you need to consider retirement planning very early is that it will make sure that you remain independent even after quitting the job market completely. If you were to start your career early and simultaneously start saving a portion of your income, then, over time, this action will result in an acquisition of long-term wealth. This is especially true in cases of mutual funds investment. This also ensures that you are not dependent on your loved ones after retiring. Because you can’t keep on working forever.
- There is a benefit of compounding:
If you are thinking of opting for a mutual fund scheme or one of the variants you need to know that they are designed to make the most of the power of compounding. This means that your investments enjoy profits whenever the value of the fund shows a rise. In case you are investing with a long-term goal in your mind, then, the feature of compounding may function to its fullest, meaning, your investments will experience growth over time. Once the profits are earned, the returns in the form of capital gains are reinvested for generating additional profits.
- It is better to start at a time when you have fewer to no responsibilities:
Even though it is true that every investor’s life plan is different from one another, one may likely have fewer financial responsibilities when they are young. As time passes and you get married, you will have responsibilities such as buying a house, paying for children’s education and, taking care of your parents as they get older. Also, older adults often require higher costs of healthcare that come with age. Based on the information above, you will realise that it will be prudent on your side to start saving for retirement as soon as you enter the job market.
- You also have higher risk tolerance:
One of the most important rules of investing is that to earn more, you should have higher risk tolerance. As you grow old and take on more and more responsibilities, your risk tolerance is low. However, when you are young and don’t have many responsibilities on your hand, you can take more risks. The earlier you were to start investing, the better chance for your money to grow.
There are numerous reasons for you to start retirement planning early. It is of utmost importance for you to start saving for retirement early after determining the overall financial goal.