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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.

  1. Employer is kind enough to give you a 10% salary hike every year.
  2. The cost of living is likely go up by 8% per year
  3. You are 35 year old and plan to retire 55 year.
  4. You don’t intend to work after you retire.
  5. Your expense are same and don’t foresee any other expense.
  6. 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
1                 7,20,000                  4,20,000                   3,00,000
2                 7,92,000                  4,53,600                   3,38,400
3                 8,71,200                  4,89,888                   3,81,312
4                 9,58,320                  5,29,079                   4,29,241
5               10,54,152                  5,71,405                   4,82,747
6               11,59,567                  6,17,118                   5,42,449
7               12,75,524                  6,66,487                   6,09,037
8               14,03,076                  7,19,806                   6,83,270
9               15,43,384                  7,77,391                   7,65,993
10               16,97,722                  8,39,582                   8,58,140
11               18,67,495                  9,06,748                   9,60,746
12               20,54,244                  9,79,288                 10,74,956
13               22,59,668               10,57,631                 12,02,037
14               24,85,635               11,42,242                 13,43,393
15               27,34,199               12,33,621                 15,00,577
16               30,07,619               13,32,311                 16,75,308
17               33,08,381               14,38,896                 18,69,485
18               36,39,219               15,54,008                 20,85,211
19               40,03,140               16,78,328                 23,24,812
20               44,03,455               18,12,594                 25,90,860
 Total Income             2,20,17,975

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.

  1. After 20 years of hard work you have accumulated Rs. 2.2 crores.
  2. Your expense are fixed, your lifestyle has not changed over the years.
  3. 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%
1                 7,20,000                      4,20,000                   3,00,000                           25,83,829
2                 7,92,000                      4,53,600                   3,38,400                           26,02,284
3                 8,71,200                      4,89,888                   3,81,312                           26,18,104
4                 9,58,320                      5,29,079                   4,29,241                           26,31,416
5               10,54,152                      5,71,405                   4,82,747                           26,42,347
6               11,59,567                      6,17,118                   5,42,449                           26,51,009
7               12,75,524                      6,66,487                   6,09,037                           26,57,529
8               14,03,076                      7,19,806                   6,83,270                           26,62,004
9               15,43,384                      7,77,391                   7,65,993                           26,64,545
10               16,97,722                      8,39,582                   8,58,140                           26,65,253
11               18,67,495                      9,06,748                   9,60,746                           26,64,224
12               20,54,244                      9,79,288                 10,74,956                           26,61,551
13               22,59,668                   10,57,631                 12,02,037                           26,57,321
14               24,85,635                   11,42,242                 13,43,393                           26,51,620
15               27,34,199                   12,33,621                 15,00,577                           26,44,529
16               30,07,619                   13,32,311                 16,75,308                           26,36,130
17               33,08,381                   14,38,896                 18,69,485                           26,26,492
18               36,39,219                   15,54,008                 20,85,211                           26,15,689
19               40,03,140                   16,78,328                 23,24,812                           26,03,789
20               44,03,455                   18,12,594                 25,90,860                           25,90,860
 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.

  1. 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.
  2. 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.
  3. Fight Inflation: By investing we can deal better with the inevitable growing cost of living- generally referred to as inflation.
  4. 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:

  1. Invest is securing our future.
  2. Saving is important but investing is most important.
  3. Invest early and reinvest income

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