Chapter 1: Need for Investment – Part 1
Everyone dreams of becoming financially independent in their lives. You probably have too. The thought of retiring with a few crores in your kitty is a comforting one. But given your current salary, you wonder if it’s even possible. Winning 'Kaun Banega Crorepati' is one option. But it’s not a feasible one. So, how do you reach your first one crore mark? You got it right – by making investments.
What is an investment?
Let’s say you buy a car. Here, the car is your asset. The value of this car will decrease with time. So, when you finally plan to sell the car, the money you receive will be less than what you paid for it. But what if you had invested the same amount of money in the company that built this car. With time, as the car business grows, your money will grow too.
This activity of setting aside some money now, in anticipation of earning a higher amount in the future is known as Investment
But it doesn’t have to be a company. This is just one of the many options available.
Let’s look at another example
If you deposit Rs. 10,000 in a fixed deposit (FD) for three years, it can give you Rs. 11,910 assuming the FD pays an interest of 6% per annum.
So, here’s an easy way to help you summarize your financial investment. Let’s try this formula:
Invested Money + Time = Invested Money + Returns
Here, it simply sums up the simple investment activity where, if you set aside a sum for a certain period, you may receive the invested amount with an additional sum.
The need to invest – Why invest?
A decade ago, a steaming mug of cappuccino at a café was Rs. 50. But today, the same cup of coffee costs no less than Rs. 250. In 10 years, this cup of coffee increased five-folds. Just imagine!
Same applies to the money you kept safely in your wallet. Did the Rs. 50 note grow with age? No. It stayed the same and it no longer buys you the cup of coffee you enjoyed 10 years ago. This is why you need to invest.
There are two primary reasons for you to invest -
- To counter inflation
- To meet financial goals
Countering inflation with investment
Previously we mentioned about the cost of coffee rising in a decade. Similarly, all food items too have increased over the years. A few decades ago, if you remember, a packet of bread was around Rs 5. But today, that same packet of bread costs Rs 40! And if you are wondering how did that happen? Because of inflation.
Inflation is the general rise in price of commodities.
From the perspective of money, inflation is a depreciation in its value, thereby decreasing your purchasing power.
You cannot control the changing prices. But what you can do is figure out how to earn more money. And you can do that by investing.
Here’s an example explaining inflation
Remember the cost of your cappuccino that had increased from Rs. 50 to Rs. 250 in 10 years?
So, this means for Rs. 250, you could have bought 5 cups of cappuccino 10 years ago.
Now, let’s assume you kept this Rs. 250 unspent for 10 years. With inflation, the price of your cappuccino risen to Rs. 250 but your ability to buy (or your purchasing power) has gone down to 1 cup with the same amount.
But, if you had invested Rs. 250 for 10 years at 12% p.a., you could have been able to buy not just one but three cups of cappuccino today.
Thus, investing can help you retain and even grow the purchasing power of your money.
Meeting financial goals
Every life stage is different, and so are its financial goals. It is important to achieve these goals as you progress with financial support.
Examples of financial goals are -
- Accumulating Wealth
- Kids’ Education
And let’s not forget, when it comes to financial goals, no one has just one goal!
Say, you want to travel the world but you also want enough money for a cozy retirement. Here, you will need to build your savings for both. But if you spend all your savings on a world tour, how will you enjoy a relaxed retirement? You wonder how some people achieve multiple goals at the same time, while it becomes difficult for you to achieve just one.
Well, you know the answer by now – investing!
So, the need to meet all your financial goals should be the second important reason to start investing.
Let’s look at how investing can achieve a goal through an example -
Manish earns a salary of Rs. 1 lakh every month. His aim is to save up for his child’s future education. Based on his calculations, he would need to accumulate Rs. 25 lakhs in 10 years.
What does Manish do?
To save Rs. 25 lakhs in 10 years, Manish will need to keep aside at least Rs. 20,833 every month from his income (considering 20,833*12*10 = 25,00,000).
But if he invests in an investment avenue that offers a return of 12% per annum, he may need to save only Rs. 11,159 per month for the same duration. That’s almost half of Rs. 20,833!
By making regular investments, Manish can meet his goal of funding his child’s education while at the same time growing his money. That means:
Manish will need to invest only Rs. 13.39 lakh (considering 11159*12*10=13,39,080) and still meet his goal.
- Investment means putting your money to work and giving it the opportunity to grow with time.
- Investing for the long term may help you beat inflation and help you fulfil your financial goals.
Now that you have an idea of how making an investment can help you achieve your financial goals, let’s find out how you can smartly and efficiently plan your investments in the next chapter
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