“I don’t have a big capital. What’s the point of investing?”

Have you ever been in this position with the same question lurking on your mind? It is generally normal for young people to have this problem where we don’t have a large enough capital. As new entrants into the working force, we receive a relatively small pay cheque and in this current economy, we don’t have much to dispose. For instance, an average fresh graduate pockets RM3,000 a month (RM2,649 after EPF contribution). Deducting general expenses of RM2,000 a month, we are only left with RM649 a month. Whats the point of investing if we don’t get a sizeable return?

Well, here is the point.

Improving Spending Habits

The whole idea of starting early is not just about making money, but to cultivate a habit of saving to invest and to be financially smart. Disciplining your spending habits, focus on budgeting and cutting out money wasting expenses, instead put the money to work and earn money by saving money. As the saying goes, a penny saved is a penny earned. Through investing early, the lessons learned will pay off in the long run, especially when you grow to have a larger capital to work with.

Don’t Underestimate The Power of Compound Interest

Compound interest is the additional interest you earn per annum added towards your principal investment. Young people need to understand the benefits of investing early and taking advantage of the potential gains from compound interest.

To understand the concept of time and compound interest, here is an example:

Taking a fixed monthly savings of RM649, Mr. A at age 25 does not invest his money but rather keeps it in his bank account. When Mr. A retires at age 65, he will see RM317,989.97 in his bank account, considering a 0.1% interest rate offered by savings accounts.

Mr. B at age 25 however, puts his money to work. He invests his savings of RM649 every month and he gets a 5% return every year and re-invests his returns. When Mr. B retires at age 65, he will see RM987,828.07.

We compare this figure with Mr.C at age 35 who is just starting to invest. At his point of life, he is able to invest RM1,000 a month. Similarly with a 5% return, Mr. B. will see RM837,129.48 when he retires at 65.

Mr. C invested a total principal of RM360,000 as compared to Mr. B who invested RM311,520. Mr. B ends up with a higher return as compared to Mr. C, even with a lower principal amount throughout the years.

We Have Time

An investment with more volatility typically yields higher return. An investor with opportunity to make riskier moves would potentially yield a higher profit. Time allows us to take more risks as we have a bigger space to recover. Also to consider the level of commitments at our age are relatively lower than a person at an older age. People who invest later in life are often inherently more cautious with how they invest.

Bottom Line

Ever heard of the quote, “you can’t revive a party but you can re-earn your money”?

Well, if you wish to have a better quality life in the future, it’s time to forget about this quote. Stop splurging on parties and drinks, buying unnecessary accessories to impress people you don’t like. Instead put your money to work and you will thank yourself when you are thinking of retirement.

The earlier you start on your investment, the greater your potential return on investment.