Why should we invest our money?

 

Understanding the concept of investment (for beginners):

Financial freedom is a term that very few Indians have an understanding of. As said, “Money may not buy happiness, but it buys freedom to do what you want to do for happiness”

Financial freedom simply means you have enough money that all your basic expenses are met without you having to work hard for or worry a lot about money. It does not mean you have to become a millionaire. It also does not mean that you stop working after achieving that amount. It simply means that you get enough money every month that your all basic expenses are met, without you worrying about food, basic necessities or work, so that you can work on things that are of your interest or you can work freely at your business or job without worrying about surviving if you incur a loss. 

Suppose you are 60 years old and you retired from your job. Now either you can depend on your children for expenses or you can depend on your own money that you made in all your life.

Let us assume you retired at 60 and you don’t want to depend on your children. Your monthly expense is 25,000 rs. which means every year you need around 3 lakh rs to lead a good life. So, for the next 25 years, if you can arrange a regular source of 25000/ month without much work, it will mean you achieved financial freedom. If you do not arrange a source for this money, then either you will have to keep working even after retirement or you will have to depend on someone to meet your expenses. 

For example, suppose you have a small shop from where you earn 20,000 per month. After all these years of savings, you have an FD of 10 lakh rs in bank which give you 5% return annually. You also have an extra shop that you have given on rent for 10,000/ month. So, from your own shop, you are earning around 20,000 per month. From rent, you get around 10,000/ month. And from bank FD interest of 5% on 10 lakhs, you get annually 50,000 rs as interest which you take out every year end and use it for monthly expenses without touching your principle amount of 10 lakhs.

So, your monthly income:

a) 20,000 rs from shop.

b) 10,000 rs from rent.

c) bank interest of rs. 50,000/12 months=4000 rs per month.

So, a total of around 34,000 rs you are getting from 3 sources and you just have to focus on 1 source that is income from your own shop. The rest 2 sources that is, rent and bank interest are automatic, you do not have to do any hard work for them. So, this is a simple example of financial freedom achieved without any complex investments. 

A lot of people talk about retiring in 20s or 30s by achieving financial freedom. This is a wrong way. Financial freedom simply means you do not have to struggle for money.

This can be achieved if you put some of your money to work for you.

How will money work for us? What exactly does it mean?

This means when you generate more money from the money that you have. Just like you get interested in the money that you keep in the bank, you make money from money. The interest that you earn from your money kept in the bank is one way you make money out of money. You are not doing anything to earn that interest. You just keep the money in the bank, and you earn interest. This is an example of how you make money without you working for it. You simply keep money in the bank, and you earn interest. For example- you kept 1,00,000 rs in the bank account and the bank account gave 3% interest every year. So, after 1 year, you will have 1,03,000 rs in your account. This 3000 rs is the money you earned without doing anything. You earned this money just by keeping the money in the bank and the interest earned on the money is what money making more money is all about. Money makes more money because investments work on the formula of compound interest. Understand this:

You kept 1,00,000 rs in the bank.

Bank gives 3% interest.

After 1 year, this 1,00,000 turns into 1,03,000 rs.

Next year, the 3% interest will be earned not on 1,00,000 rs, but on 1,03,000 rs. That means you will get interest on interest every year. This is what compound interest is all about. Investment in finance like banks, Fixed deposits, stock market, etc give compound interest. That means you earn interest on interest.

How and why should we invest our money?

When you earn money through a business or get a salary every month, what we can do with that money? Let us see below the general ways in which salary or income is used:

Suppose your salary is 50,000 rs per month. Your monthly expense is 35,000 rs including rent, fees, grocery, etc. everything. Rest 15,000 is left every month with you as your monthly savings. Now, what you can do with this 15,000 rs?

1. You can keep it in a savings account.
2. You can put it in a fixed deposit.
3. You can invest somewhere.

Let us understand each of these 4 steps.

1. Savings account: If you keep these 15,000 rs. in a savings account, you will lose your money. Let us understand how. Inflation is a term used for the yearly decrease in the value of money. That means every year things get more expensive and your value of money decreases. For example, the price of 1 kg onion was 5 rs in 2001. Today the same amount of onion will cost us 15 rs. This price increase is called inflation. Now, the value of 5 rs in 2001 was equivalent to 1 kg of onion. Today the same weight of onion is for 15 rs. That means the value that 5 rs had in 2001 is the same as the value 15 rs has in 2021. This means in 2001, you could get 3 kg of onion for 15 rs, but today, you will only get 1 kg of onion for 15 rs. This means inflation increased 3 times since 2001. And this also means the value of money decreased since 2001. Take another example. In 1950, if you had 1 lakh rs with you, you would have been a millionaire then. Today, that same 1 lakh rs. is of very less value. This is because every year, the value of money decreases because inflation increases. Now, the rate of inflation in our country is around 5%. That means every year, the value of your money decreases by 5%. If you keep money in the savings account, the savings account gives 3% interest on your money every year. So, inflation is 5% but interest is only 3%. So, every year, the money that you keep in the savings account will decrease by 2%. This is a practical fact that the savings account will decrease the value of your money every year, and so, it is not a good idea to keep your money in the savings account.
2. Fixed deposits are the same as savings account. The only difference is that you will get a 5-6% interest rate and in case you need money, you will have to break the entire fixed deposit. You cannot take a small amount of money out from a fixed deposit as you can take it out from a savings account. Now, inflation in India is 5% and Fixed deposit interest is 5-6%. So, your money will increase only by 1-2% if kept in a fixed deposit. A fixed deposit means your money will be safe and grow at the rate of 1-2% yearly which is very less.
3. Investing somewhere: There are different types of investments that we can do. People invest in buying gold, silver, land, property, shares of companies, etc. All these are popular types of investments to grow your money. Let us discuss each one now:
4. Gold and silver: Indian families are very interested in buying gold etc. This is a good and safe investment because every year, the value of gold for the last 30 years has increased at an interest rate of 10%. The problem is that buying gold is a difficult task for some of us and there are chances of forgery if we are not experts in gold buying and checking the quality. Also, the interest in gold is generally 10% which is higher than a fixed deposit but comes with a risk of being low or fake in quality, apart from the fear of losing or theft. It also requires a big amount of money to invest.
5. Land and real estate: Indian families are very interested in land and properties etc. This is a good and safe investment because every year, the value of land increase by a good % of 5-6%. The problem is that buying land is a difficult task and there are chances of forgery if we are not experts in land buying and checking the documents. Also, the investment in land requires a huge amount of money which is not possible for all of us. The interest in land is generally 10% which is higher than fixed deposit but comes with the risk of being cheated and also, a huge amount of sum is required. Another problem is that selling land is a difficult task, which that means in case of an emergency, you will not be able to sell the land immediately.
6. Investing in stocks and share market: The best way to invest your money so that your money grows safely and easily is through the stock market. In the stock market, you generally get at least 12% interest, which may even go to 20% sometimes. It is very easy to invest as there are a lot of mobile apps through which, you can safely buy and sell stocks or invest in the stock market or mutual funds. The initial amount required to invest in the stock market is very low. You can start with even 500 rs only. And there are very less chances of forgery as everything in the stock market happens online and with proper data records and the latest technology. Investment in the stock market is safer than land and gold as there is hardly any chance of forgery. You do not require a big amount to invest in stocks as you need for gold or land. You get higher interest than Fixed deposits and gold. Your money grows as you indirectly give your money to big companies who work night and day to make their companies grow. And with the growth in those companies, your money also grows.

That is why it is the best option to invest your money in the share market regularly so that you make your money grow with time. To understand how the share market works, refer to the previous article on the same blog link.

Subhav Samarth

+91-9015661671.

gcsubhavsamarth@gmail.com