Time is a friend and enemy in investing





I'm writing this article for my good friend, N. I hope to help you by summarising the essential strategies I have learned so far. With the right strategies, it is possible to achieve your financial goals, including building a sufficient retirement fund. I will explore some options for investing and provide tips for managing finances.

Firstly, it is important to create a budget to track your income and expenses. Knowing how much you spend and what you spend on is the foundation of good personal finance. One way to do this is to allocate a portion of your monthly income to different categories. For example, you could allocate 50% of your income to living expenses, 30% to savings and investments, and 20% to discretionary spending. Additionally, reducing your living expenses will allow you to save more for retirement.

Next, start saving for emergencies. Aim to have three to six months of living expenses saved in a savings account. This will help you avoid going into debt in case of unexpected expenses, such as a medical emergency or job loss. Once you have an emergency fund, you can start investing for the long-term. My preference is investing in an index fund as one of the best options for retirement planning.
 
Investing in index funds is a great way to diversify our portfolio and achieve long-term growth. Index funds track a market index, such as the IDX-30 Index by Avrist or BNI IDX 30, that consists of the 30 biggest capitals of stocks in Indonesia and aims to replicate its performance. By investing in an index fund, you can benefit from the growth of the underlying index and reduce the risk of individual stock market volatility.

To illustrate the benefits of investing in an index fund, let's compare two scenarios. Suppose you save Rp. 500,000 per month in a bank account for 30 years. At an average interest rate of 1%, your savings will grow to approximately Rp. 202 million. However, if you invest the same amount in an index fund that yields an average return of 7% per year for 30 years, your investments will grow to around Rp. 1.1 billion. This example highlights the substantial difference in returns between investing in a bank account and investing in an index fund.

One of the most critical aspects of investing for retirement is starting early. The earlier you start investing, the more time your investments have to grow, and the more you will have when you retire. To illustrate this, let's compare two investors. The first investor, Andy, starts investing in an index fund when he is 25 years old and invests Rp. 1 million per month. The second investor, Dian, starts investing the same amount in the same fund when she is 40. Assuming the same average annual return of 7%, Andy's investments will grow to approximately Rp. 1.1 billion by the time he is 55 years old. On the other hand, Dian's investments will only grow to around Rp. 300 million. This example highlights the importance of starting early and the power of compounding returns.

Another important aspect of managing finance is considering the impact of poor spending habits on our financial goals. For example, suppose you spend Rp. 75,000 on two cups of coffee at Starbucks 3 to 4 days a week, which adds up to around Rp. 300,000 per week. If you invested that amount in an index fund that yields an average return of 7% per year for just 10 years, you would have around Rp. 130 million.  It’s like walking around with a hole in our pocket and we keep on losing what we thought was ‘small change’. 

My last note would be to say, time is a valuable asset when it comes to retirement planning. The earlier you start, the more time your investments have to grow and compound. I know you’ll say, my friend N,  "I’ll start later, I’m still young, I'm still busy with my work", but without realizing it, time passes quickly, and before you know it, you've missed out on valuable time to save and invest for retirement.

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