There are numerous reasons why you should begin investing and purchase insurance at an early age. But, when you initially start your career, you might be in a situation where you have little money that barely covers your living expenses, leaving a very limited amount to save or invest. Such a situation requires you to decide whether to invest or insure yourself first.
Before deciding, it’s crucial to understand why it’s essential to start investing and purchasing life insurance early in life.
Here are three reasons why you should begin investing as soon as possible:
Making early investments improves your spending habits
Your income might be minimal when you first start working. And if you wish to save money from your salary, you must limit your consumption by adopting a budget. This basic practice creates a habit over time, eventually improving our spending patterns in the long term.
To begin saving/investing, set aside a portion of your salary at the beginning of each month. Then, with the remainder of your funds, create a monthly budget. For example, if your monthly salary is Rs 30,000 and you aim to save Rs 10,000 every month, set aside Rs 10,000 upon receiving your salary. Then, construct your monthly budget with the remaining Rs 20,000.
You benefit from the power of compounding
Starting your investments early allows you to stay invested for a longer period, which increases the impact of compounding. Let us illustrate this with two easy examples.
Assume you wish to set aside Rs 5 crore for retirement. With that in mind, you begin investing in an equity-based mutual fund at the age of 22. For this, you will need to invest Rs 5,500 every year for the next 38 years, totaling Rs 25 lakh.
The aim remains the same in the second example, but you begin investing in it much later, say at 45. In this case, you must invest Rs 1 lakh each month for the subsequent 15 years, resulting in a total investment of Rs 1.8 crore.
This juxtaposition underscores the advantage of compounding over an extended investment horizon.
The investment amount is small because the investment term is longer
Continuing from the previous point, note that because of the benefit of compounding, you need to invest a considerably smaller amount if you stay invested for a longer period.
In the previous example, we used two scenarios in which the objective amount remains constant, but you begin the investment at two distinct ages. In the first scenario, you begin investing at the age of 22 and continue for 38 years. Your monthly investment for this comes out to be merely Rs 5,500 over the years, while the total investment amount is Rs 25 lakh. Now, if you delay the investing process and start towards the same goal at 45, your monthly contribution will be increased to Rs 1 lakh, with a total investment amount of Rs 1.8 crore in 15 years.
In this scenario, the total invested amount is substantially more in the second case than in the first.
Why is it necessary to obtain life insurance at a young age?
We frequently postpone purchasing a term life insurance policy due to some misconceptions. The usual belief is that because we are young and healthy, or because our responsibilities are light at this moment, we do not require term life insurance. However, contrary to popular opinion, purchasing life insurance early on is usually advantageous. Let’s see how:
Here are three reasons why you should obtain life insurance as soon as possible
The Premium is affordable
The main advantage of purchasing life insurance early in life is that the premium amount is substantially lower than what you would pay if you bought it later in life.
Assume you wish to buy a Rs 1 crore insurance covering you for the next 75 years. If you buy it at 25, the annual premium will be Rs 8,000. It would be Rs 10,000 at 30. The premium for the identical policy at 45 would be Rs 30,000. Note that these figures are illustrative and vary across the different life insurance companies in India.
The premium remains constant throughout, so you spend less overall.
In the case of certain types of life insurance plans, the premium remains constant throughout. As a result, if you buy it at a young age, the premium will remain low throughout. Furthermore, you would pay far less in total.
Assume you purchased a Rs 1 crore term insurance policy at the age of 25 that will cover you until age 75, and you pay an annual premium of Rs 8,000. So, you’d pay Rs 4 lakh in all. However, if you purchase the same policy at age 35, the annual premium will be Rs 15,000. As a result, the total sum you must pay over the years is Rs 6 lakh.
Your family is protected from the start.
The sooner you purchase term insurance, the sooner your family will be protected. Even if you are not married, your parents may be financially dependent on you, or you may have a loan (car loan, education loan), in which case your family will shoulder the burden if you die prematurely. Having term insurance assures that your family will not face financial difficulties if something happens to you.
Check out life insurance plans by Edelweiss Tokio Life Insurance to find affordable life coverage with plenty of benefits. Visit their website and find your first life insurance policy today.
Finally, should you invest or insure first?
Let’s say you are 25 years old and currently have a monthly income of Rs 40,000. You can withdraw Rs 10,000 monthly, totaling Rs 1.2 lakh yearly, for savings/investments/insurance. So, what should you do? The best course of action is to do both things simultaneously.
Here’s how you might allocate the funds for insurance and investments.
- Life Insurance: Your limited responsibilities make a term cover of Rs. 1 crore adequate now. The yearly premium for a Rs. 1 crore term policy taken to cover you till you are 60 would be approximately Rs. 8,000. (Estimated. Please check actual figures at the time of purchase)
- Investments: You can invest the remaining Rs 1.12 lakh in mutual funds. Because you are young and willing to take chances, you should invest in equity mutual funds.
Lastly, remember that financial planning is a dynamic process that requires constant tweaking over the course of your life. So when your income grows, you should also increase your investment amount. Additionally, you should also evaluate your life insurance policies regularly to ensure they are comprehensive enough for your needs.
