#4 Personal Finance – Lesson 2 -Why should you Invest the money you save?

Hi  😊 welcome to lesson no 2 ,in the basic personal finance series. Today ,we will see, why should you invest the money that you save? Hey ! you must be thinking now that, dude you just asked me to save and now you are asking me to invest that money? you must be knocking why should I invest my hard saved money and I can leave it that and keep the saved money close to me.

Well!  you have to invest that saved money   for fundamentally two reasons -the first one is for the  simple and feared word known as “INFLATION!"( This first boss level foe in our financial freedom- A real toughie) We have to overcome that dreaded inflation to add value to that saved money. and the second reason is that the  magical phrase which is for" making money work for you".

So ,what is Inflation---If I have to explain in practical terms, imagine we go to a supermarket to buy groceries for Rs 1000/-.  So ,in the next year, if you are going to buy the same quantity of groceries the price you would pay now would be Rs 1100/- ,In the third year the same quantity of groceries  would now be priced  at  Rs 1300/-...

In another case ,if you could remember what our parents used to say, when we were at your age , we could buy an entire meal at just 10 rupees or we could take an entire holiday 5000 rupees budget -Err😌 Is that even possible today ? Absolutely Not!-No way!

In the above two scenarios, "we observe that for the same amount of money, we get lesser things in future".--( Feel the words).

 Therefore, Inflation is basically, increase  in the cost of  goods & services year on year. 

India’s current inflation rate  is somewhere at  5% inflation rate ( Average assumption). That means the cost of your basic goods and services is going up by 5% every year.

For instance, if you have the experience of living in a rented apartment, every single year your landlord will renew your rental agreement to increase the rent by 5%. 

Similarly if your favorite  Cadbury diary milk costed you Rs 100 ,five years ago , that same  Cadbury diary milk chocolate will cost you  Rs 500 today.

So, as you see with the above discussed situations, the cost of the same goods and services increases year on year.

“Now, if you are to save money and NOT invested that saved money, then the value of the money goes down (depreciates) over time ."

To bring some practicality into  the above quoted text,-

To break it down simpler. Lets consider 3 friends. ITACHI , NARUTO, SASUKE (Yeah ! Naruto comes into party !)

All  three of them  have Rs .1 lakh each with them.

 Sasuke  feels that  investing  money is unnecessary work and prefers to keep his money in cash

Naruto is a bit prudent that he invests that 1 lakh in a savings bank account which pays him  around 3.5 % interest

Itachi  as he is  prudent , informed and empowered , he  invests in mutual funds which delivers 15 % growth year on year

After 20 years ,

SUBJECT	ITACHI	NARUTO	SASUKE
Initial amount	1,00,000/-	1,00,000/-	1,00,000/-
Financial Instrument	Mutual Funds @15% year on year	Savings A/c @ 3.5% year on year	Cash
Final Amount after 20 years	Rs 16,36,654/-  Itachi being the empowered and prudent of all had managed to  beat inflation (5%) and grow his wealth by 10% above inflation	Rs 198,979 /- You would think Naruto has done a decent  job but unfortunately it s not the case.  Since the inflation is at 5% . Naruto is losing  value to extent of 1.5 % year on year - which is (Naruto has lost Rs 66,351 due to the effect of inflation)*	Rs 33,000/-( thirty three thousand) ONLY Value of  Rs 67000 has got eroded due to the 5% inflation effect  year on year.

 *Note: For a 1 lakh to hold its  same value after 20 years should  become Rs 2,65,329 . ( 1 lakh should grow at 5% for 20 years to negate the inflation effect of 5%)

( It means that  20 years ago ,if we  had bought a new  bike worth Rs 1 lakh ,now the same bike  brand new from the showroom would be selling at  Rs 2,65,329/- today .( This increase in cost is  due the impact of inflation of 5% for 20 years).

☝By now you must be getting it ,why it is important not only to save money but also to invest it.

Yes, dear friends, at bare minimum we fundamentally have to beat the toughie inflation. Ironically the most preferred and safe investments in India like the Bank Fixed Deposits technically cannot beat inflation.

In order to beat inflation, we have to save money and also invest the saved money in right mix of financial instruments😊.

Point to Ponder : What causes Inflation?( Interesting one- Micro+ Macro level Economics is involved in causing inflation-  I will take this one up in an upcoming blog !)- until then you learn from this source from the below link.)

https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp

 I hope the previous blog in the personal finance series and this blog would have sensitized the pressing requirement of  saving and investing in right spirit and understanding.

If you could save money and also invest the saved money in right mix of financial instruments then you are doing that magical phrase which is “you are making money work for you “.

In the next blog in the personal finance series, we will see how you can build your mind and  master the art of saving through a simple process driven approach.

Hope you enjoyed reading this one. Thank You, keep safe & Be Empowered... 😊

This blog “Empower Finclass "is an effort to educate and spread the word of financial knowledge and awareness whilst empowering the community with a touch of practicality on personal finance.

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