Why is investing your money necessary?

Investing your money is very important if you want to be financially sound and if want to create wealth in the long term. I wish many people were aware of it. If there is one regret that I have financially – it is not starting to invest my money sooner. I have been doing regular investments for 4+ 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. Clearly, 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 don’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 need to invest your time and effort to learn about it. I eventually started investing at the age of 27. But, it wasn’t until last year when I really 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 absolutely 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 essentially the reduction in purchasing power of our currency over a period of time. In other words, you can also call it the increase in prices of goods over time. As of March 2021, the current rate of inflation in India is close to 5.52%. Historically it has been between 4-6% per year. So what does it really 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 afford to buy a good that is worth 100 Rs today, exactly a year from now.

After the above example, it is clear that keeping cash is the worst way to save money. Let’s consider a bank account. Most banks (on average) offer an interest rate of 3-4% on your savings account. 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.

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 absolutely necessary if you want to beat inflation.

2. Passive Income

Passive income is the money you earn with little to no active maintenance or work. 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. As people, we all have 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, or 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 your aim is to build wealth, it is necessary that you are making money round the clock and not just during the hours you actually work.

3. Achieve Financial Goals

Human Beings are not trained to plan long term. But humans are trained to dream of the future. It is quite a contradiction that we are born with. And most people end up living 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 sometime. 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, 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 after 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%.

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 money, we not only put just half the money from our pocket, but we also halved the time duration to achieve that goal. Plus we also saved the 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, it is very important that we understand what Capitalism really means. And, I feel very surprised that very few people can actually 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) in something that you believe will give you back profits. And as the definition suggests, ‘capital’ is an important part of this society. And one of the base principles of this social structure is – “Money Begets Money”. It is absolutely 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. 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. So, you earn returns from your investments and 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.

Investing can also be used for tax saving in certain situations which is a win-win.

6. The Power of compounding

The concept of compound interest is that the returns you earn out of your principal amount gets added back to your principal. So, you earn returns on top of your returns. Again, the principle of compound interest is not applicable 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 in 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 as cash in hand. This is how you money will look like in 10 years –

If the above table doesn’t convince you about the power of compounding, I don’t know what will. It is also important to understand that for compounding to work for you, you need to give it time. Now if we look at the same data as above and instead of 10 years, you consider the horizon as 30 years. Here is what those numbers would look like –

Years - 30
Cash - 10,000
With Simple Interest - 40,000
With Compound Interest - 1,74,494

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

Conclusion

There, like I said earlier, if you are not investing your money, you are loosing its value. And over a period of time, the loss compounds to an extent when you start heading towards 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.

I hope you liked this blog and found it useful. If you are interested in reading more on this topic, do subscribe to my newsletter and OneSignal notifications to get updates.

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.