Why Investing Money Is More Important Than Saving It?
I was discussing with my friend about this topic. Did we brainstorm for hours to decide whether investing money is more important than saving it?
Eventually, we settled on 5 main reasons why we should focus on investing more. Today, I want to share those reasons with you which emphasizes the importance of investing money rather than keeping it idle.
The Concept Of The Future Value Of Money
This is one of those important concepts that everyone should understand to manage their money. In practice, the future value of money means, ‘the increment you will earn by investing a certain amount today with a pre-decided interest rate for a specific period’.
On the other hand, if you do not invest it today then the amount that you hold will be inversely impacted by the inflation rate. In simple words, it means the value of money does not remain constant. It increases if you invest and decreases if you don’t.
Let us understand the same with an example if you have INR 1000 and you invest it today for 1 year at a 10% rate of interest then by the end of the period you will receive INR 1100.
Whereas, if you choose not to invest it and keep them idle and an inflation rate of 5% then the purchasing power of money will reduce to INR 950. If you want to invest money then you can use the concept of the present value of money which will help you determine how much money you need to invest today to achieve specific financial targets.
The formula to calculate future value is P x (1+r x n)
Where P is your invested amount; r is the rate of interest expressed in decimal (10% means 10/100 = 0.10);n is the number of years of investment and, the formula to calculate present value is FV/(1+r)^n.
Where FV is the targeted financial goal; r is the rate of interest (considered as the discount rate in case of present value) expressed in decimal as explained above; n is the number of years within which you wish to accomplish the financial goal.
This may look intimidating at first but once you understand the concept this will serve as the basis for most of your investment strategies.
The Impact Of Inflation
Inflation means an increase in the price of goods and services. Moderate inflation is necessary for a country’s economic development. For individuals, inflation means expensive products.
To counter the effect of inflation we need to ensure that we grow our money in such a manner that we do not find it difficult to make important financial decisions due to the increased prices.
First of all, to counter the inflation we need to know a few things like what is the current and estimated future inflation rate, risk appetite, and then decide on the investment choices. International Monetary Fund (IMF) is the apex entity that has a database for information related to inflation, GDP, and much more.
When you are making any investment decision make sure to pay attention to the rate of return and inflation rate to arrive at the absolute returns.
(Returns from investment (nominal) – Inflation rate = Absolute returns)
Taxation is something that creates anxiety in people mostly because they are unaware of the ways to reduce the implication or they simply assume that it is difficult to understand. The government extracts tax money from individuals directly as well as indirectly. Direct taxes are the ones which individuals need to pay on his/her income whereas indirect taxes are the ones which we all pay for consuming products and availing services.
Making an investment can result in tax benefits as the majority of the investments fall under tax-exempt categories. You need to pay a minimum or no tax on such tax-saving or tax-free investments.
Moreover, some of these investments are made into government schemes resulting in public welfare. From a personal point of view, you can avail the maximum benefits and minimize your direct tax implications by smartly investing your money. Whereas if you keep the savings idle, you are likely to pay more taxes on the same.
Investment Generates Source Of Passive Income
To manage a household and increase financial strength, it is always good to have multiple legitimate sources of income. Through proper investments, you can open various avenues and streams of passive income.
Let us say, you have invested your money in a monthly income plan (MIP) mutual fund which will start paying you deferred income every month in addition to your regular source of income.
This will give you that sense of confidence to make more such investment. The investment is again subject to various factors which include your age group, marital status, risk appetite, etc. hence choose your investment plan accordingly.
Boost Up Domestic Investment In The Economy
Lastly, this is a reason which benefits the country’s economy as a whole. If you keep your money in saving accounts in the bank then the banks offer the amount as a loan to industries and let the money flow in the economy.
But if you look at the economy, then share markets are at the center of the financial body. Countries allow foreign investments in the financial markets but when the situation goes south these foreign investors are likely to withdraw their money to book their margins which significantly impacts the stock markets.
Having higher domestic investment will bring stability to the markets. The money that you invest in the markets actually strengthens it and eventually helps the economy.
Conclusion – Investing More Important Than Saving?:
From the reasons mentioned above, it can be concluded that we should focus more on investing than keeping the money idle. On the other hand, saving money is also an integral part of money management.
You should keep aside the money that you may need in an emergency. This will help you put more focus on long-term investments which you would not need to discontinue in the middle. I would love to know your thoughts and suggestions on this topic. So, share feedback about the post in the comment section.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2021 Shyam Sewag