Many of you must have come across suggestions from your elders that “Money saved is money earned”. This basically implies that you should cut down your expenses and save money, emphasising that every penny you save is equivalent to an earning. If you follow this, you not only inculcate a habit of saving, but also understand the value of money.
However, one must acknowledge the fact that times are fast changing, so are your lifestyle and expenses. So, with changing times, it is also important to adjust your financial planning to meet your future expenses and needs.
To start with, one must understand the difference between saving and investing money.
Let’s understand it with an example. If you earn, say, Rs. 10,000 per month; and your monthly expenses are Rs. 7,000, you save Rs. 3,000 and keep it aside as your monthly savings. This way, you have a collective savings of Rs. 36,000 a year and as is a normal human emotion, one feels good to see their savings grow with each month.
But unfortunately, the value of your overall collected savings tends to come down given the declining power of money to buy, i.e., inflation. Let’s assume the inflation rate for the year is at 10%. This essentially means that your collective savings of Rs. 36,000 will be sufficient only to buy goods worth Rs. 32,400 next year taking inflation into consideration. That, in effect, means that your buying power declines and you are forced to cut your needs year-after-year.
In short, if you tend to only save money and not invest to grow it, you are actually eroding your wealth on a regular basis. Habits of only savings could make you incapable to fulfil the future financial requirements, year-on-year.
Investment of money, on the other hand, provides a solution to overcome the impact of inflation in years to come. Investment is nothing but putting your hard money in financial instruments where your money also generates a return, or in simple terms, your money grows.
To understand it better, let’s go back to the above example where one saves an annual amount of Rs. 36,000. If this amount is invested in a financial instrument which offers, say, 10 per cent return, the value of the invested sum of Rs. 36,000 will turn out to be Rs. 39,600 after one year. This essentially means that the worth of your invested money increases 10 per cent a year later.
Such an increase in value will not only help one keep pace with the yearly inflation but also help reduce financial stress of fulfilling future needs. The pace of inflation can be well gauged from the fact that in a few years, prices of daily consumables like milk has gone up from Rs. 30 per litre to over Rs. 50 per litre, sugar prices are ruling at over Rs. 40 a kg against Rs. 18 few years back. Similarly, prices of pulses, rice, wheat and edible oil, among others have significantly gone up in last few years. Therefore, investments of money must be preferred over plain-vanilla savings.
As far as investing money is concerned, there are several avenues available in the financial sector which are well regulated and have a distinguished track record of performance. Instruments like Mutual Funds, Banks’ Fixed Deposits, Recurring Deposits, Post Office Savings and Corporate Bonds, among others offer various investment opportunities to investors. It is advisable to focus on inflation-beating investment instruments rather than just saving it in a piggy bank.
The writer is CEO, BankBazaar.