Step 1: Asking the right questions and why saving isn’t enough
You work hard to earn your money. But there will come a time when you’ll not want to or be able to work. This is why you would want to set aside some money to pay for your expenses when you retire.
When you save, you should also expect your money to work as hard as you. That's what investing is about – putting money to work earning more money.
The big questions, when it comes to investing, are about:
#1. Why one should invest
#2. Where to invest
#3. How much to invest
#4. How long to invest for.
This series of posts will provide conclusive answers to these questions and make you a better investor.
Saving is just not good enough.
It may come as a surprise to you, but the money you save is NOT safe in the bank. Even though your statements show the same value every month, your money is being eaten away daily by the economic beast called inflation.
Inflation hurts your savings more than you know
Inflation has been running in India at about 9% per annum. This is how it affects you and your money:
Let’s say you can buy a kg of apples for Rs. 100 today. You put away Rs. 100 in your drawer. A year later, you take your Rs. 100 and go to buy apples. Apples are now Rs. 109 per kg due to inflation and your Rs. 100 now buys only 900 g of apples.
This happens every year, so if you waited 20 years to buy apples with your hundred rupees, you would only be able to buy about 200 g of apples. Your money in the drawer would have lost 80% of its value in 20 years!
If your money was in the bank earning 4% interest every year, it would have done slightly better and lost only 70% of its value in 20 years.
To hold its value and be able to buy the same 1 kg of apples after 20 years, your money would need to earn at a rate of at least 9% per annum (same rate as inflation).
But what if you would like your money to buy 1 kg of apples AND 1 kg of oranges 20 years from today? In other words, you want your money to grow and improve your life style?
To grow, your money must be able to beat inflation – by earning a rate of return that is higher than inflation.
The first investment choice you must therefore make is whether you want to beat inflation or just match it. In investment terms the choice comes down to either growing your wealth or merely preserving it.
In the next post, we will talk about the 3 main choices when it comes to building wealth. Stay tuned.