A few days back, someone asked this question on Quora – Should you Invest or save more in life ?
We were a bit surprised, but then realized that people view Saving and Investing differently, as a lot of us end up saving money but don’t Invest it.
Let’s understand the difference and why they are both important.
Saving money is the first step. It’s what’s left over from your income after expenses.
Investing is what helps your Savings Grow.
If you leave your savings in a bank account or fixed deposit, it will grow at about 4 to 7% per annum.
If you invest your savings (e.g. in Equity ), they can grow at a much larger rate ranging from 12.5 to 15% per annum.
Its important to invest your savings because inflation gradually reduces the value of your savings.
If you are earning 4% interest in a bank account and inflation is 6%, you are losing 2% of your savings every year. Yeah.
So yes, you should save more, AND Invest it, else its better to spend it rather than making your bank richer.
Also, use this formula
Expenses = Income – Savings
instead of Savings = Income – Expenses ( Traditional way of saving where you spend first and then whatever is left is your savings)
You should also determine how much you want save (ideally it should be atleast 20% of your income) and then spend the rest of the money available.So if you earn Rs 50,000 per month, you should first save atleast 20% or Rs 10,000 and then budget to spend the balance of Rs 40,000
Do you know what you are saving for ?
You are probably doing to get something with the money at a later point in time…maybe in 1 year or 10 years later. Stuff becomes expensive over a period of time on account of inflation (e.g. house rents go up by 10% every year in most metros) However the value of money (your savings) goes down every year on account of inflation.
E.g. If inflation is 6% and and you have saved Rs 100 this year, it will be worth Rs 94 next year. However, if you had invested it in an asset at 12% return, then your money would have grown from Rs 100 to Rs 106 (112 – 6).
That’s why AFTER you have saved your money, you NEED to invest it – so that it grows beyond inflation.
If you invest Rs 10000 per month at 15% return, you can have almost Rs 9 lakhs after 5 years, or Rs 28 lakhs after 10 years. Instead if you save it in the bank, you will have just Rs 7 and Rs 17 lakhs respectively.
SCARED OF INVESTING ?
A lot of folks are also scared of investing on account of two reasons:
- They think they are spending the money and it’s not with them anymore (A bank FD on the other hand provides more comfort)
- A Bad experience in the past – They would have ‘invested’ some money in the stock market or mutual fund based on a tip and lost some money. This bad experience would have left them with a bad taste and the thought ‘Investing is risky and one only loses money. Let’s do a FD where atleast my money is safe”
Investing is not always risky if you do it right and have a long term view. Also, your money is still yours and you can still withdraw it when you want.