Why Is Investing Your Money Necessary?
Why keeping cash or in bank accounts is not an option
Investing your money is very important if you want to be financially sound and if you want to create wealth in the long term. I wish many people were aware of it.
If there is one regret I have financially — it is not starting to invest my money sooner. I have been doing regular investments for 7–8 years now. And, I believe I have decent experience and knowledge to share now so you can make sound financial decisions.
While reading this 2015 SEBI Investor Survey, I was surprised (shocked would be an appropriate word) to find that only 3.37 crore (~2% of the Indian population) invest in equity. Now, equity is not the only way to invest your money. And this data is a few years old. But we can still conclude that India is not investing to its full potential. In the US, the long-term average is close to 55% of the adult population.
There is a lack of awareness and a sense of fear that we Indians have while investing our money.
I had the same fear too. When someone asked me why I didn’t invest my money, I would say I am good at technology but I don’t understand finances. It was a stupid thing to say. If you are not good at something, you must invest your time and effort to learn about it.
I eventually started investing at the age of 27. But, it wasn’t until a few years later that I started understanding its power. And since then I have been doing a lot of research on this topic and following the sector closely.
This is why investing is necessary. And if you are not doing it, you are preparing yourself for a financial disaster. Here are my reasons for investing my money.
1. Inflation
Understanding Inflation is very essential for every individual. Inflation is the reduction in purchasing power of your money over some time. In other words, you can also call it the increase in prices of goods over time.
As of December 2023, the current rate of inflation in India is close to 5.69%. Historically it has been between 4–6% per year. So what does it mean? It is rather simple to understand.
Assume that you have 100 Rs cash today. You keep that for exactly a year. So, the next year, the purchasing power of that 100 Rs will reduce to ~95 Rs (in today’s value). In other words, you will not be able to buy the same thing that is worth 100 Rs today, exactly a year from now.
Keeping cash is the worst way to save money.
Let’s consider a savings account. Most banks (on average) offer an interest rate of 3–4%. So if you keep the 100 Rs in a bank for a year, it would become ~104 after a year. But, due to inflation, the purchasing power of those 104 Rs will become ~98 Rs (in today’s value). So even in this case, you are losing money. You are becoming poorer.
Now imagine what happens to those 100 Rs 20–30 years from now if you keep it as cash or in the bank. That is one math I don’t intend to do, ever.
So, why is investing necessary you ask? Because we have to beat the inflation.
You lose money if you keep it in the form of cash or in a bank account. So, investing is necessary if you want to beat inflation.
2. Passive Income
Active income is the money you make that is in direct correlation to the time you spend on it. Like a job or a business.
In contrast, passive income can be a one-time setup or very little regular effort. Here, the money you make is not directly associated with the time you spend on it.
We all have exactly 24 hours in a day. And there are only so many hours we can actively work every day. So, you have to find ways where you make money even when you are sleeping, reading a book, or are on a vacation.
I cannot stress this enough. In today’s world, passive income is not only a safety net, but it has become a necessity. While there are a lot of different ways to earn passive income (that is another blog post for another day), investment can act as your biggest passive income in the long term.
If you aim to build wealth, you must be making money around the clock and not just during the hours you work.
3. Financial Goals
Human Beings are not trained to plan long-term. But humans are trained to dream of the future. This is quite a contradiction that we are born with.
And most people end up living in that contradiction.
My question to them is, why?
Why can’t we achieve our dreams and our financial goals? We have the potential to do that. While some are more privileged than others, we all need to take that leap of faith sometimes. From dreaming to achieving.
By financial goals, I am also talking about life events. Weddings, child education, retirement, buying a house, health expenses, travel goals — these are all life events that require a lot of money. And these are events most of us cannot or don’t want to avoid. Along with these, we also want to buy a new car every few years, update our appliances, do home maintenance, etc.
But, it is important to identify these goals, acknowledge them, and make a strong investment plan. If you break it down into numbers, these goals are not too difficult to achieve.
Say you want to buy a house worth 1 Crore Rs in 10 years. And let’s assume you make 1 lakh Rs a month. Now, even if you save 50% of your earnings, it would still take you 20 years to achieve your goal.
But, if you choose to invest you could achieve the same goal in half the time with less money from the pocket. How? Let’s do the math. Let’s assume you start a monthly SIP of 45000 which has an average return of 12% (very achievable).
Monthly SIP - 45000 Rs
Expected Return Rate - 12%
Time Period - 10 years
Invested Amount = 45000*120 (12 months * 10 years)
= 54,00,000 (54 lakh Rs)
Estimated Returns = 50,55,258 (~50 lakh Rs)
Total Value = 1,04,55,258 (1 Crore+)So, by investing our money, we put just half the money from our pocket, and also reduce the time to achieve that goal by half. Plus we also saved an additional 5k money per month which we could invest somewhere else.
Achieving your financial goals is not difficult if you start investing early, form a habit, and break it down into numbers.
4. Money makes money
We live in a capitalist society. Now, I am not here to start a debate on Capitalism vs Communism. I know they both have their pros and cons. But the matter of fact is, we are currently living in a Capitalist Era. And I don’t see that changing anytime soon (at least in my lifetime).
So, we must understand what Capitalism is. And, I feel very surprised that very few people can define or understand the concepts of capitalism, communism, etc.
The basic definition of Capitalism as per the dictionary is — an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state. If you want to understand more I recommend this YouTube Video.
Simply said, you are free to put your capital (money) into something that you believe will give you back profits. And as the definition suggests, ‘capital’ is an important part of this society.
One of the basic principles of this social structure is — that “Money Begets Money”.
It is your moral right to reject this kind of society. But if you want to thrive in this society then you need to participate.
You need to make your money work for you and not the other way around.
5. The Power Of Compounding
The concept of compound interest is that the returns you earn out of your principal amount get added back to your principal.
You earn returns on top of your returns.
The principle of compound interest does not apply to all investment types but to a lot of them.
To show you the power of compounding, let’s do some math. Let’s assume we have 30,000 with us and we equally divide it into 3 buckets — 10000 in a fund that offers compound interest of 10% annually, 10000 in a fund that offers simple interest of 10% annually, and 10000 in cash. This is how your money will look like in 30 years.
Initial Investment -
Cash - 10,000
With Simple Interest - 10,000
With Compound Interest - 10,000
After 30 Years -
Cash - 10,000
With Simple Interest - 40,000
With Compound Interest - 1,74,494It is also important to understand that for compounding to work for you, you need to give it time.
Did you look at the dramatic graph? Are you convinced yet?
Compound Interest is the 8th wonder of the world. He who understands it earns it; he who doesn’t pays it. — Albert Einstein
6. Tax Saving
This is a secondary consideration in my opinion. But, it could be important to you.
A few investment options will also help you save some tax. You not only earn returns from your investments but also save tax. This is a win-win situation.
In India, there are multiple tax saving investment schemes like NPS (National Pension Scheme), ELSS funds (Equity Linked Savings Schemes), PPF (Public Provident Fund), etc. We will try to explore a few of these investment strategies in another blog. But if you are young, if you are in this for the long haul, and if have a decent risk appetite — you can skip these.
Conclusion
There, like I said earlier, if you are not investing your money, you are losing its value. And over some time, the loss compounds to an extent when you start heading toward a financial disaster. In this Financial Freedom series, we will explore this topic further and talk about how you can strive to be financially free. We will try to achieve that together, you and I.
Disclaimer: I am not a financial advisor. I have no affiliations with any financial institutes. All the opinions shared in this blog are mine only. I am sharing my personal financial experiences and the knowledge I have gained over the years.
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