Are You SAVING or INVESTING?

Most of the time we misconstrue savings with investments. But let us tell you that there is indeed a difference between the two.

Investment means let your money start working for you. Whereas putting aside money under the mattress, or in a vault, bank locker or savings bank account after meeting your expenses and liabilities can be called as savings, which does not mean that money works for you.

In times where the inflation bug is eating into our earnings, we need to move a step forward and invest. More importantly, invest wisely!

Let's delve a little deeper and understand the difference between the two...which can help us march forward in our journey of wealth creation.

What is Savings ?

Savings refers to preservation of wealth for future use. It is an act of putting aside money after defraying expenses and liabilities (...therefore the unspent income results in savings). To put it simply:

Savings = Income - All expenses including obligations towards borrowed money

How to Increase Savings

1. Make a a budget ...Ascertain your income and necessary expenses. frame the budget in a way that allows to save more. 
2. Control the expenses ...try to avoid those expenses which aren't necessary.
3. Refrain from impulsive buying ... Before going for shopping make a list so that we can be within our control and do not indulge into unnecessary purchases. 
4. Start saving at an early age ..the sooner the better. The early we start planning the better and easy it would be. Remember, we can always postpone our decision to buy a favourite gadget, but should save for a rainy day.)
5. Don’t over-borrow / credit ..Now a days banks/finance company’s gives consumer durable loan just by pan card/ address proof and cancelled cheque even car loan and personal loans are also very easily available. However it does notmean that we should take watever is available. Similarly we may own and use a credit card, use it thoughtfully knowing our means - Remember: excessive credit can lead to a debt trap!
6. It may be small start but save regularly ....Remember, single drops poured regularly can fill the buckets if …so we must remember that every bit of savings can help you attain financial freedom.

Finally: 

As explained above how should we shave but then the next questions comes it just saving the money is enough? By just saving can we achieve our life's goals? - Which could be: buying our dream home, dream car, sending kids abroad for higher education or their marriage, money for retirement or amongst a host of other ones. 

Lets think about it. 

We know, over the years, the value of money diminishes due to inflation. So the money we have saved - kept aside in your vault, bank locker, savings account, or under the mattress - may lose value as the inflation bug eats into your savings if it is not allowed to grow at a decent pace? Therefore, in order for it to grow, we need to put our 'money saved' to money invested as in productive use - and make money work for us! 

And what should we do to make money work for you? 

Well, the answer lies in INVESTING!

What is Investing?

Investing is an act of laying out our 'money saved' for productive use with an expectation of earning return more than inflation to preserve purchasing power of money We can call it is a process of making our 'money saved' to work for us (instead of simply stacking in our vault / bank locker or under the mattress)

How does investing benefits us ?

1. It will grow our savings
2. As it is put on productive use so it helps our money work for us
3. It helps in countering inflation and maintaining purchasing power of money …As said earlier the money tends to lose its value over time due to inflation - which eats into our hard earned savings - we can counter the inflation bug by investing and maintain the purchasing power of money for our future..
4. We can achieve our financial goals in life ...like buying a dream home, a car, taking care of children's education needs, their marriage and own retirement amongst a host of others..
5. Helps wealth creation…this way we can create wealth and leve it for our next generation to remember us…
6. Provides a sense of financial security…as we all call “baap bada na bhaiya sabse bada rupiyaa”….if we have money we can feel secure and enjoy the life..

What is the Right Approach to Investing?

1. Objectives should be clear ... First of all we should be clear that why we are investing with what objective in mind.. whether it is long term or short term..             as different investment avenues are meant to cater to respective investment objectives. So enough care should be taken while investing money. Ideally each of our investments should match our investment objectives.. 
2. Understanding our own risk tolerance ...if volatility makes us nervous then risky investments such as stocks and equity mutual funds may not be the ones for us and we have to find other stable and safer options in fixed income instruments instead, such as fixed deposits, PPF, etc…
3. Know the risk involved while investing ...as we all know that, every asset class – i.e. equity, gold, bonds and real estate - has risk associated with it and therefore it is necessary to know about the same before investing we put our hard earned money in them.. 
4. Consider our age and earning horizon ...this will help to have the right investment instruments appropriate for your age)
5. Clarity about the time period for the investments ...As we all know the longer the investment it will give more of the returns…and also can take higher the risk..by investing in risky classes but before that we should be clear that when we need this moany so that it can be invested accordingly..
6. Do sufficient research ...It is important that we should not get carried away by exuberance and / or what other like friends and family say. Instead, we should undertake solid fundamental research on respective investments, and please do not get caught up in hype....understand how the product works)
7. Assess cost of investing (...Everything has its own cost…so we should be aware what he hapveto pay for that particular investments.. it is vital to keep an eye on terms and conditions associated with the investment avenue. Very often many indulge in trading in the stock market to make a quick buck without really understanding the associated costs they are paying for regular trading or churning..
8. We should focus to invest which earn more than inflation (...Investments should be able to beat inflation if we really want them to grow and match the future requirements.. it will also help to achieve your financial goals smartly and efficiently)
9. Know the tax implication ...tax is a very important part of investments as it can eat a ajor part of earning so we should know which are tax efficient options and how best we can use it in our favour. Or else we may end up paying higher tax on returns..
10. Sooner the better...we should start investing by the time we start earning…as there are benefits of doing so. we can understand it well by taking a look at the following table and chart)
    
    

The Sooner the better..

Let us take an example of 3 friends – Ram, Shyam and Balram - All 3 had good jobs and wanted to retire at the age of 60. Ram being the smarter of the lot, started planning for his retirement at the very initial stage, at 25, and invested Rs. 10,000 per month. Shyam realised the importance of planning for retirement once he was 30, while Balram could feel the guilt of being left out only when he was 35. See what they accumulated when they were on the verge of their retirement. 

Particulars	Ram	Shyam	Balram
Present age (years)	25	30	35
Retirement age (years)	60	60	60
Investment tenure (years)	35	30	25
Monthly investment (Rs.)	10,000	10,000	10,000
Total Investment Amount (Rs)	42 Lakhs	36 Lakhs	30 Lakhs
Returns per annum	12%	12%	12%
Sum accumulated (Rs)	6.43 Cr	3.49 Cr	1.88 Cr

(Return per annum mentioned above is for illustration purpose only)

Not only this, they also noticed a wide deviation in the proportion of growth they saw on their invested corpus. While Ram's money grew around 15.3 times, Shyam's money grew 9.69 times and Balram saw a growth of just 6.26 times

Its important to remember while investing..

Finally, we should always keep in mind following points while investing..

To Save

1. SAVE before you spend.. ...: It is always important to control our expenses and save for a rainy day.. 
2. It is never too early to save ...we should start saving from the day we start earing..its never too early..in fact, savings can help you feel financially secure and you can slee in night without worry for the next day..
3. Small amount also matter but do it regularly…AS said above small drops can also fill the bucket if they are pouring regularly…so don’t postpone investments as you feel its too small to save.. 

While Investing

1. Don’t be in hurry while investing (...undertake thoughtful research by doing a detailed study)
2. Its not a joke ..Investing is a serious activity (...for non-finance background people it can be a boring activity but its serious activity and should be given proper weightage…
3. Don’t speculate ..Although trading  can be a thrilling experience, but it can be killing as well if the tide turns against our expectations. So it is best not to fall for excitement and exuberance)
4. Invest emergency funds in safer avenues (...Emergency funds should be kept in saving accounts or liquid funds not for long term investments like equity or equity mutual funds.. remember, they are put aside as part of your savings to meet your requirements on a rainy day
5. Invest own money not from borrowed funds ...Investment should be made out of own funds except in the case of investing in real estate or your own business; but again, while investing therein don't go beyond your means..
6. Know where we are putting money...understand the basics where we invest how it works and undertake research; recognise the risk-reward relationship the product offers..
7. Diversify ...Never keep all the eggs in one basket ..diversification can help to reduce our risk to your overall portfolio if we diversify wisely..

Some Important Ratios to Track Your Personal Finance

Total investment to Income Ratio =	Current Value of Total Investments
	Total Annual Income

This ratio helps you understand the current value of investments done as a ratio of current income. 

At a younger age this ratio tends to be lower. However with time one needs to accumulate enough savings and invest to fulfil various financial goals in life. 

Savings to Income Ratio =	Total Annual Savings
	Total Annual Income

This ratio simply tells you what part of your income you are saving annually. Higher the ratio, the better it is, as it facilitates you to invest and lets your money work for you. 

Debt to Income Ratio =	Total Debt
	Total Annual Income

This ratio would help you evaluate the proportion of total debt as against the total annual income you earn. 

Lower the ratio, the better it is. 

Following these ratios, can help us to keep a track of your finances.