Do we save or invest?

Savings start with our first piggy bank in childhood. But as an adult, there should be more to money than a sum in the bank

By: Sayantani Kar and Aishwarya Agarwal

Investments will be nigh impossible if there are no savings to channel. But even if they coexist, too much of savings is not a good thing these days.

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Fixed deposits had been the Indian middle class’ best friend when it came to parking their savings. Either that by way of investment or they would leave their hard-earned income in a bank-savings account. And, some would have just stashed cash in the house for later use. But the winds of change are driving this hardy social tier to trust better financial assets.

As the economy finds it increasingly hard to shake off inflation, the money we save gets eroded. With a saved sum, say of Rs 1,00,000, the list of what we can afford gets curtailed as the years wear on. Here is an estimate of the effective value of your savings after one year:-

Source: Tavaga Research

Individuals and families are waking up to the urgent need of creating wealth, and the earlier the better. Most of us can not stave off inflation as the cost of living will grow at a faster clip than our pace of earning money. The staid interest earned on savings accounts (4-6%) and fixed deposits (6-8%), whose rates get cut with every systemic push to curb inflation, can not create wealth. Investments will.

But investing all of our money is not feasible. Depending on the kind of investment, there would be lock-in periods before we can access the money again, or we might be required to stay invested for an optimum period to get a good return. Investments are less liquid compared to savings in a bank account or cash in hand.

Here is how savings differ from investments:-

SavingsInvestments
High liquidity, readily availableLess liquidity than in savings
Low riskHigher risk
Low earnings on money, as low interest rateAssets appreciate faster with time
Best for personal expenses and short-term goals of one-three yearsBest for goals to be achieved in five or more years; also, to secure the future better
Leads to erosion of the saved moneyWise investments compound earnings, add wealth
Preserves the principal/capital sumMultiplies the principal, but risk can erode it as well

No time for a land and gold rush

Till a few years ago, real estate and gold jewellery were considered to be trusty ways to invest. But these come with concomitant costs such as those for storage and security, acquisition (administrative fees for realty and making charges for gold ornaments) and maintenance. Given the real estate bubble in the Indian market, the appreciation rate is a shadow of its former self. As for jewellery, there is always the making charge forgone and impurities that chip away at its value.  

Financial assets for high inflation

Financial markets are a definitive way to create wealth in this day and age. The instruments are linked to the health of the economy and in a growing economy like that of India’s, the returns have the potential to best inflation.

Fixed deposits and small savings instruments like Public Provident Fund are no-to-low-risk financial assets but their capacity to beat inflation is less compared to equity, derivative and commodity markets. These could be used in conjunction with money markets but should not be the only investment instrument in our arsenal. Our article explains the best ways to invest.

Earlier the better

Just as savings instruments do not compound our wealth at a healthy pace, starting to invest at a later age robs us of an easy edge. When we invest early, we are allowing our money to get compounded returns for a longer period of time, since the years of earning are limited and on an average similar for everyone. Hence, starting to invest in our twenties or even thirties brings with it the quintessential benefits of the early bird. We would have the chance to earn compound interest on our returns and also reinvesting our investment income to earn more.

Here is an example of starting early:-

Source: Tavaga Research

And here is why higher returns compound even better:-

Source: Tavaga Research

So, we can safely trust the wisdom in investing as soon as we start saving. Savings should not be made to sit idle as we have a long road to traverse before we rest in life.

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