How many of us remember learning the difference between Savings and Investing? Have our schools and teachers spent enough time teaching us the difference between these two words?
We take great pride in saying that a typical Indian household saves anywhere between 20 to 30 percent of earnings every month. This is a very good number. But the problem with a number is that it has got to be looked at in relation to another number. When savings are compared with inflation, you get real money. Real vs Nominal has to be the most important variable in deciding if something is a saving or an investment. Nominal Rate of Return is the reported percentage rate without taking inflation into account. Real Rate of Return is after accounting for inflation.
As our economy expanded, consumption of goods and services expanded as well. The challenge most households faced was that a lot of their consumption was funded by their surplus over the savings threshold. However, the past decade has witnessed unprecedented growth in aspirational-led consumption. A lot of this is funded by the power of plastic cash or credit. From a pure personal finance perspective, people unconsciously started to spend from their savings.
The essential operating formula: Earnings – Consumption – Savings = Investment
This formula will invariably lead to a zero investment allocation. And for people who are used to carrying forward Credit Card dues, the investment allocation will always be a negative number!
We desperately need to shift our focus towards an investment mindset from a savings mindset. Investment is deploying money for profit. Essentially, by investing, you make your money productively work for you. Hence, give it every possible chance of beating that ugly word ‘inflation’.
The good thing today is that there are products available that help you save and invest at the same time. Mutual Funds are an excellent vehicle to do that.
The ideal operating formula should be: Earnings – Investment – Savings = Consumption
Investing regularly and adequately is the only way to secure a safe and happy future for yourself and your family.
Start investing now!