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.
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
- Make
a a budget ...Ascertain
your income and necessary expenses. frame the budget in a way that allows to
save more.
- Control
the expenses ...try
to avoid those expenses which aren't necessary.
- 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.
- 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.)
- 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!
- 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!
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 ?
- It
will grow our savings
- As
it is put on productive use so it helps our money work for us
- 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..
- 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..
- Helps
wealth creation…this way we can create wealth and leve it for
our next generation to remember us…
- 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?
- 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..
- 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…
- 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..
- Consider
our age and earning horizon ...this will help to have the right
investment instruments appropriate for your age)
- 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..
- 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)
- 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..
- 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)
- 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..
- 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
- SAVE
before you spend.. ...: It is always important to control our expenses and save
for a rainy day..
- 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..
- 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
- Don’t
be in hurry while investing (...undertake thoughtful research by
doing a detailed study)
- 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…
- 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)
- 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
- 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..
- 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..
- 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.
Really interesting. Great Learnings for me.
ReplyDeletethanks for the compliments..
ReplyDelete