Can we remember our childhood before getting well into bare of Investing. Perhaps we or ourselves must have seen children around us who used to save money in piggy bank. However from the very beginning we know about Saving. Saving is the basis of Investing. Are saving and investing the same. Let us explain.
What is Difference between saving and Investment
Many people think Saving and Investing as the same. Actually they are not. Saving is that part of your income and how much there we save. It means you set aside to spend at a future date. Investing however, is taking your savings and making your money work for you by putting it in financial instrument or product such as Shares, Bonds, Fixed Deposit, Property and even term deposit. Investment generate income for you. So first come Saving and then Investment.
Why should we Invest
Why should we Invest? The answer is very simple: To create wealth. And why would we create wealth? To fund various financial goals we may have in our life like Expensive Car, Retirement and so on. Let us now connect the childhood habit of piggy bank with Investing.
Before we address the above question, let us understand what would happen if chooses not to invest. Let us assume you earn 60000/ per month, and you spend 35000/ towards your cost of living which includes food, transport, shopping, medical etc. The balance of 25000/ is your monthly surplus. Let us ignore the effect of Income Tax in this discussion.
Let us make a few simple assumptions.
- Employer is kind enough to give you a 10% salary hike every year.
- The cost of living is likely go up by 8% per year
- You are 35 year old and plan to retire 55 year.
- You don’t intend to work after you retire.
- Your expense are same and don’t foresee any other expense.
- The balance of 25000/ per month is retained in the form of the hard cash.
Here is how the cash balance look like in 20 years.
|Years||yearly Income||Yearly Expense||Cash Retained|
Now we remember our childhood days and piggy bank. Around 2.2 crore amount is our piggy bank. If we realize these numbers, we would soon realize this is a scary situation to be in. Few things are quite starting from the above calculations.
- After 20 years of hard work you have accumulated Rs. 2.2 crores.
- Your expense are fixed, your lifestyle has not changed over the years.
- After you retire, assuming the expense will continue to grow at 8% after 10 years of post retirement life. 10th year onward you will be in a very tight situation.
Let’s assume another scenario where keeping the cash idle, you choose to cash in an investment option that grows at let’s say 12% per year.
|Years||yearly Income||Yearly Expense||Cash Retained||Retained cash @12%|
|Total cash after 20 years||5,27,30,525|
With the decision to invest the surplus cash, your cash balance has increased significantly. The cash balance has grown to 5.27 crores from 2.2 crores. Do you understand our piggy bank is only saving either childhood or adult age.
Now going back to initial question of why invest? There are few reasons following below.
- Financial Independence: Our investment enables we to independent and not rely on the others money in any event of financial hardship. It ensures that we have enough money to pay for our needs and want for the rest of our life without having to rely on someone else or having to work in our old age.
- Financial Security: People want to financial secure and that’s why they need to have extra money. They are able to protect themselves financially against whatever financial hardship that that might strike them. Having an investment ensures that we are financially free to meet such unforeseen events.
- Fight Inflation: By investing we can deal better with the inevitable growing cost of living- generally referred to as inflation.
- Create Wealth: By investing we can aim to have a better corpus by the end of the defined time period. Compounding is the seventh wonder in this world.
Key factors on this Chapters:
- Invest is securing our future.
- Saving is important but investing is most important.
- Invest early and reinvest income