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While growing up, you may be attracted towards buying many things that are beyond your reach in money terms. You may want to buy that new multi-gear bicycle, the Bluetooth headset or that beautiful coat to not just enjoy for yourselves but also to flaunt it to your peers and relatives.

There is no limit to the material goods that can be had – if only you had some money of your own to buy these goods! Of course, it is important to get your parents’ permission to be allowed to purchase what you want to buy just as much as it may be necessary to ask them for the requisite funds to get you the item of your choice.

But what if while they do give you the permission to buy the goods you want, they may not have the money to spare for these goods of leisure. In any case, money is the key ingredient to be able to buy these things for yourselves.

But, before we get into a discussion on how to afford these goods, the question arises, do you really need these things? In order to understand what is important and what takes priority, you must distinguish your wants from your needs.

You must be able to understand what is important for your financial growth, prosperity, and betterment and what is it that only provides temporary benefit without contributing to your future growth and prosperity. You must remember that a bicycle today is not as important as a house tomorrow or a secure future post-retirement.

Even though affording a house or having a post-retirement paycheck may be something to worry about way into the future and not a matter of concern for you in your present teen years, the reality is that time flies by and all this time that you think you may have passes away faster than you might actually realise.

So it is always better to start saving and keeping money aside today for a higher goal and a brighter future tomorrow. As a youngster, you must start weighing decisions and understand the possible outcomes. You must understand the opportunity costs involved and decide in favour of something that has greater benefits or higher returns than something which may have temporary or lesser benefits and not benefit you in future.

But for all the talk of spending prudently or saving money for the sake of a brighter future, the question arises, how to have sufficient money in your hands to actually weigh decisions and outcomes or to even invest. To be honest, it is not as difficult to procure money to save as you might imagine. You can find ways to save little by little every day until you have the bare minimum to start bigger investments.

You can ask your parents to give you the change that is left over from the visits to the supermarket, pay you a stipend on every book that you finish reading or allocate a monthly allowance for your expenses.

Suppose your parents give you a certain monthly allowance, you can save that money instead of spending the same. If your parents give you a few thousand rupees every month, it is possible that by the end of the year, you have an amount of Rs 50,000/- saved with yourself. This is a good amount of money to start investing.

It’s just that it takes a bit of discipline to be able to save the allowance every month and not spend on anything, specially not give-in to impulse buying. At the same time, as a teenager, you would be well-advised to not spend against credit cards and fall in a debt trap.

Given that in your teen years, where almost all your expenses are paid for by your parents or guardians, the monthly saving should not be an impossible task. However, as a responsible teenager, you must be strict with yourselves and save that money by keeping it in a bank account or in custody of your parents or even in a piggy bank.

Now that you have an amount of Rs 50,000/- saved with yourself, you can invest this money in numerous ways. Investing will give you the benefit of earning return on your funds while keeping your saved funds intact (in many cases).

You can invest your funds in mutual funds, Exchange Traded Funds (ETFs), Government bonds or the stock market or a combination of these in order to diversify your investment and mitigate your risks. Investing in mutual funds may be a good way forward.

Another option is investing in ETFs, as well, as it’s a relatively low cost, diversified and less time-consuming (from research perspective) avenue of investment which can be invested in through the stock market. This amount of Rs 50,000/- can be saved every year and invested in the desirable source of investment to earn sufficient gains in the long term.

A point to note is that as one grows in age, one tends to become less risk averse and is focused on investing in stable instruments of investment which may not provide for a high return. On the other hand, when one is young, as when you are a teenager, you have familial support, and, therefore, you can afford to invest in instruments which have higher risk involved which can generate higher returns. So you are better placed to invest aggressively in earlier years of your youth than in your later years.

By investing in the stock market and mutual funds, you can reap the benefits of compounding. Compounding is the process in which earnings from an investment, such as dividends from stocks, are reinvested to generate additional earnings over time. In fact, it is highly recommended for you as teenagers to invest early as time is on your side and take advantage of compounding to earn substantial gains over the long term.

It is extremely important to start early and save regularly. We take the example of Ahmed and Basit, where Ahmed invests Rs 50,000/- every year from age 13 to 20 and doesn’t invest again. On the other hand, Basit invests the same Rs 50,000/- yearly from age 21 to 39.

Assuming a 10% rate of return, note their ending balances whereby Ahmed has saved a higher amount of money than Basit. Because of starting early, the amount saved by Ahmed is a lot more than that saved by Basit even though Ahmed saves and invests for fewer years than Basit while both are taking advantage of compounding.

At the age of 39, the invested amount of Ahmed is Rs 3.846 million whereas that of Basit is Rs 2.813 million. This clearly demonstrates the power of saving and starting to invest at an early age whereby you can leave the investment amount be and let it multiply.

TABLE

======================================================================
          AHMED                               BASIT
AGE     INVESTMENT      BALANCE      AGE    INVESTMENT         BALANCE
======================================================================
13      Rs 50,000      Rs 55,000      13         0                   0
14      Rs 50,000     Rs 115,000      14         0                   0
15      Rs 50,000     Rs 182,050      15         0                   0
16      Rs 50,000     Rs 255,255      16         0                   0
17      Rs 50,000     Rs 335,781      17         0                   0
18      Rs 50,000     Rs 424,359      18         0                   0
19      Rs 50,000     Rs 521,794      19         0                   0
20      Rs 50,000     Rs 628,974      20         0                   0
21          0         Rs 691,871      21     Rs 50,000       Rs 55,000
22          0         Rs 761,058      22     Rs 50,000      Rs 115,500
23          0         Rs 837,164      23     Rs 50,000      Rs 182,050
24          0         Rs 920,881      24     Rs 50,000      Rs 255,255
25          0        Rs 1,012,969     25     Rs 50,000      Rs 335,781
26          0        Rs 1,114,266     26     Rs 50,000      Rs 424,359
27          0        Rs 1,225,692     27     Rs 50,000      Rs 521,794
28          0        Rs 1,348,261     28     Rs 50,000      Rs 628,974
29          0        Rs 1,483,087     29     Rs 50,000      Rs 746,871
30          0        Rs 1,631,396     30     Rs 50,000      Rs 876,558
31          0        Rs 1,794,536     31     Rs 50,000    Rs 1,019,214
32          0        Rs 1,973,989     32     Rs 50,000    Rs 1,176,136
33          0        Rs 2,171,388     33     Rs 50,000    Rs 1,348,749
34          0        Rs 2,388,527     34     Rs 50,000    Rs 1,538,624
35          0        Rs 2,627,380     35     Rs 50,000    Rs 1,747,486
36          0        Rs 2,890,118     36     Rs 50,000    Rs 1,977,235
37          0        Rs 3,179,130     37     Rs 50,000    Rs 2,229,959
38          0        Rs 3,497,043     38     Rs 50,000    Rs 2,507,955
39          0        Rs 3,846,747     39     Rs 50,000    Rs 2,813,750
======================================================================

Conclusively, it is important to remember that if you save early on in your younger years by not spending your money on goods of fleeting importance, by exercising financial discipline, and by spending a marginal amount on only that which is most important for the present whilst saving every penny you can for your future, you will have saved sufficient funds for investing. Thereafter, you can start investing early on, in various financial instruments or a combination thereof, taking advantage of diversification, thereby mitigating your financial risk, and making use of compounding, to make substantial gains from your investment after a period of several years of investment. In the final analysis, it pays well to save and invest early and prudently!

The views expressed in this article are not necessarily those of the newspaper

Copyright Business Recorder, 2022

Raeda Latif

The writer is Head of Marketing and Business Development, Pakistan Stock Exchange Ltd

Comments

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ahmad Oct 19, 2022 02:03pm
good article for the beginners.
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