Why and when you should start investing money rather than just saving it

Remember the day you got your first job? After so many years through schooling, college and finally you’ll be liberated from the education system. No more classroom. The day you start earning would be the day you will always remember.

We had dreams while studying. ‘I would get a great job. My own place not shared by 7 other people. I would make my breakfast in my own kitchen, omelet, bread-butter, and juice, just like in movies. I would come home after tiring day, and just land on my extremely comfortable sofa in front of t.v.’

Life changes but not how we expected it. We work 9 hours a day, 5/6 days a week. We do overtime to meet the deadlines. 1–2 hours of tiring commute every day. Despite all this, we earn only enough to satisfy basic human needs. None of the things we imagined during student life is going to come true through your salary.

Best time to start investing time, energy, and money

When you are pursuing a degree, studying is pretty much all you can do. Or can develop a hobby. You don’t have money, and most of your activities are controlled by your parents.

But when you start earning, you become more independent. 20’s is the time when you have control, energy and time; almost perfect to shape your professional and financial future. What lacks is reason and motivation.

Rent, food, transportation, everything is becoming costly. Inflation is one of the biggest problems. Soon you will get married. Marriage itself is a huge weight on your pocket. Then comes kids. You need a bigger place to fit all. Schooling is even costlier these days.

The earlier you start saving for the future, the better. But no matter how efficiently you manage your expenses, not much remains to save. We are optimistic people, and rather than complaining about the job we should make peace with whatever we earn. But we should never miss an opportunity.

Fortunately, the job is not the only opportunity we get to fulfill our financial needs. Remember those great resources- time and energy? Invest it. How? I’ll explain. But first, let me explain what happens if you just dump your money in a savings account.

Why putting all hard earned money in a savings account is not a good idea

Because of inflation. How? (Math alert!!!!) Past 47 years (1969–2015) inflation rates in India averages to 7.6 %. When inflation increases, buying the power of money decreases.

Let’s say you put your money in SBI savings account which provides 4% annual interest. Now, your initial 10,000 rs in a savings account becomes 10,400 after a year, but due to inflation, its actual value is equivalent to 9610 rs of today. By next year its equivalent to only 9264 rs of today. Amount increases, but buying power decreases. See more on Inflation.

What about Fixed Deposit(FD) Account?

FD is the most conservative investment method. Interest rates vary based on duration and amount. Let’s take highest into consideration. For amount less than 1 crore, and duration of 1.5 to 2 years, SBI FD account gives 7.45% interest rate(Highest of all).

Now, what was inflation rate again? 7.6%, still higher than the interest rate. Amount increases by 7.45% (in the best case) but it’s buying power decreases by 7.6% per year. Though original amount will increase, its equivalent buying power will be less than the original amount.

What are better options?

Above options are the easiest. Because all you need to do is to find out the bank with the highest interest rates to put your money. They would even come and collect money if the amount is big enough. Done!! Even a teenager can do it. Other methods do not just require money but time and work(energy).

In below methods, you have to understand how they work, what to do, what not to do. You have to have patience. These options can be adopted as part-time, by doing work in your own free time, or you can make it full time also.

1. Real Estate Inflation is not constant. Sometimes its high and sometimes its low. When inflation rises, property prices rise with it too. So it’s an inflation-proof investment. And it also provides 6–6.5% average return on investment in the form of rent. Buying leveraged properties with potential for manyfold increase in value provides great returns. One of the problems is it requires a large amount of investment.
2. Bonds When a company needs money, they take the loan from investors by offering bonds to the investor. In return, companies provide interest to the investor at a specific interval, which is called “Coupon”. Company returns bond money(principal) back at a pre-specified date which is called maturity. Different bonds have different interest rates. The company may not be able to provide you with money if the company does not have any to give, i.e. when a company goes bankrupt. Riskier the bond higher the return. Understanding bonds are a complex thing, and it needs time and effort.
3. Equity shares Stock, equity, and share mean the same thing. You get two things when you buy a stock. One is a portion in the capital of the company. Second is a portion of the distributed profit which company makes. A stock exchange is an organization which facilitates stock brokers and traders to trade company stocks and other securities. Stock investment is always a challenge. To avoid losses, it is important to have a disciplined and systematic approach to equity investment.
4. Mutual Funds Stock investment may seem cumbersome to you. If you do not want to dive deep into complexities of investing in stocks and still want more returns than savings account then Mutual Funds are perfect for you. A pool of money from the investors just like you are managed by professionals. These professionals then invest in diversified stock options. There are many mutual fund options available from which you can choose based on various factors such as level of risk, expected performance, etc. Mutual funds are a long-term investment and you should avoid it if you want to invest for just 1–2 years only.
5. Initial Public Offerings(IPO) IPO or Public issues is when a company’s shares are offered to the public. You can buy them directly from the company during IPO, or you can buy them later through the stock exchange. Public issues provide you with an opportunity to pick shares at relatively low prices. But as public issues are cheap, more people would be interested in buying it. And if demand is more than supply, everybody requested for the issue may not get the shares. Many IPO’s once issued trades considerably higher on stock exchanges than the price of their public issue. You can sell them shortly or make a long-term investment too.

All these methods give better returns than savings account/fixed deposit. You should not put all your eggs in one basket. You should diversify your ‘portfolio’. A portfolio simply means investment done in a wide range of asset classes such as stocks, bonds, etc. Diversifying portfolio reduces the chances of loss and increases returns.

The rich invest their money and spend what is left. The poor spend their money and invest what is left.

-Robert Kiyosaki

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