This question seems so obvious, but like numerous other behaviours, investing also is impacted by inertia. I am surprised at the number of people that I have come across who do not see the need to invest and more importantly, survive pay-check to pay-check. These are some of the people who earn comfortably well. The points that I have usually come across are – “Why do I need to invest, let me enjoy today!” Or “I don’t know all that, it’s too complicated” or better still “I’ve been wanting to invest, but don’t know how”. I felt the importance to put my perspective for the benefit of those who are still unsure. Whether you choose to invest or not, be it your CHOICE and not due to inertia or lack of knowledge.
WHY CAN’T I ENJOY?
You should of course enjoy, but also plan for future enjoyment. It is not great that we are able to enjoy today and not able to, at a later point in time. Well, agree consumption is good for the economy and it keeps the country going, but remember in a society and growing economy like India where there are no strong social security measures, it is important to safe guard a comfortable life during later stage. There is a monster called inflation that is looming around! Just see below what the monster at a simple 7% per annum could do to your money.
BUT YOU SAID WE ARE IN A GROWING ECONOMY!
I can already hear your counter my above point. India is growing, so will your income. What if inflation is 7%, the income will grow much larger than that! If I get 10% hike every year you can beat the inflation! You are absolutely right, but It is important to note that the tax rates go up as your income goes up. Assuming the present tax rates and an annual increment of 10% your income over the next 30 years will look like this.
The Blue line is your gross income and the Gray line is your net income. Orange line, Tax is catching up almost as much as your income growth is! For income that you’ll be earning in 2050, you’ll pay almost 30 lacs of tax. But it is still growing isn’t it? Do you want to know what your net salary of future is worth today at 7% inflation? See below:
Oh, Whoa! Where did the income go? Basically the hike that you comfortably assumed is eaten away by tax and inflation. Essentially you keep running on the treadmill imagining that you are really running fast. Now you know where you have reached! Do you still want to plan the trip to Spain? Do it quickly!
I CAN REALLY CONTROL MY EXPENSE TO BEAT INFLATION
Well, now that you know that inflation pulls your consumable income down, so can you beat it by managing your expenses well? You could, but with changes in your life stage, the nature of expenses will grow very differently! Currently you are able to enjoy great health. But research has shown higher levels of related health issues due to urban pollution, lifestyle habits, higher sedentary behaviors, etc. This will result in more expenses towards healthcare as you grow older. More importantly, the medical expense inflation is almost 2X of the normal inflation.
Housing related expenses grow anywhere between 10-15% in urban cities and by the time you decide to settle down in life, the education related expenses really stare at you. At the current trends in India, cost of education is growing at 2.5X of normal inflation.
WHAT IS NOT AN INVESTMENT
Ok, but why should you be a hoarder? your company is already deducting PF you do investments to save tax don’t you? I know this thought has come to our minds at some point in time. While there is a lot of investment options available, it is important to break some myths. The below are not investments:
Not just a Tax saving tool–While you are contributing to Provident fund, it has a limited growth rate and you cannot withdraw whenever you need. If it is growing, good, but you need to do more!
Life Insurance Policy that your dad bought when you started working is definitely not an investment. It is important to understand the difference between an insurance cover and investment. Insurance covers unexpected events in life, it doesn’t provide you resources for your consumption.
Jewelry are good to flaunt, not a great investment. I know all our elders advise us to buy jewelry whenever we get an opportunity, but imagine paying a premium of anything between 15%-25% to the seller as margin (making charge, etc) and boy, when you want to sell it, you’re in for a shock!
Iphone, car, Bose headphones are definitely not investments. We tend to call them so to convince ourselves of the great indulgence! If you still think so, just try selling your old mobile phone, best of luck!
OK OK, WHAT DO I DO NOW
If you are convinced about the importance of investment, please start today! This is not intended to sell any specific product nor am I a certified investment adviser. The objective is to greatly simplify the art of investments. Do try to invest atleast 20-30% of your monthly income. When it comes to investment, just remember 3 important points – NOW is the best time, Invest REGULARLY, most importantly, DIVERSIFY!
You may choose a simple Recurring deposit, Fixed Deposit or a mutual fund depending upon your risk appetite. No matter where you invest, do read the offer document carefully before investing.Assuming you invest 10,000/- every month, earning a modest 8%, see the wealth that you would create!
Enjoy the power of compounding! Start today!
Do leave your thoughts and comments.
This is not an investment advisory. The intent is to simplify investment related concepts. Please seek professional advise before investing!