Author: Shubhang Agrawal
India Inc., as we all know, has grown at a breathtaking pace in the past two decades. Each year a plethora of global brands are setting shops in India. Some might argue that a huge impetus to our growth story is being provided by the consumerization mindset. However lucrative this seems, India traditionally has had a ‘saving’ mindset, a concept not so prevalent in the west.
This article stems from the multiple conversations we have had with budding entrepreneurs and students who are enamored by the idea of flashy consumerization as seen in western economies. While this has its advantages, not saving or investing enough might have disastrous consequences owing to social security constraints in India. But this still does not answer the question: Why Invest!
Simply put, investing is a tool for building wealth; it is an act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit.
Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future”. The goal of investing is to put your money to work in one or more types of investment vehicles in the hope of growing your money over time.
Although spending is easy and provides instant gratification, it is essential to inculcate discipline while saving and prioritizing the way our money should be put to use. Anyone who has ever talked to a financial advisor, would have heard the words saving and investment used interchangeably. But obviously, one could not be more wrong in assuming investing is equal to saving.
Fun trivia: 100 rupees earned 30 years ago will provide groceries worth only 14 rupees now! Money stashed inside pillows, aside of raising IT suspicion, will depreciate in value too! Not the best way to save money and neither do banks with an interest of 4% help. That’s when investment instruments help by increasing our money over a period of time. There are different types of investment instruments, but will detail them out in our subsequent blogs.
I always thought that it would be nice if I could enjoy life now and stash money for future later. Of course I will earn more as I grey! (Hopefully!!) To compound, things I was always bad at Math. Neither was I good with finance as I grew up. I didn’t understand time value of money and the power of compounding! Too technical, but I promise this is the last time I’m using these words in this article. Without being too technical, what I mean is, neither did I understand that money loses value over time nor did I know that invested money grows exponentially over time. In a nutshell, money loses value over time due to inflation and invested money grows because the earnings on the investment also earn interest with the passage of time.
Let me break my promise for the first and last time. I’ll put in some Math and Finance to illustrate my point.
Of course we understand Math; Also Latin! FV = PV x (1 + ( i / n)) ^ (n x t)
FV = future value
PV = present value
i = the annual interest rate
n = the number of compounding periods per year
t = the number of years
Given this formula, assuming an investment of Rs. 10000, with a nominal return of 10%, the investment would grow to about 27000 in 10 years. Definitely beating inflation! Assuming if I had to earn Rs 27000 after 10 years and had I invested after 8 years, I would have had to invest an amount greater than 20000!
The power of compounding far exceeds the pace at which salaries grow in India and with greying; money will not be growing if proper financial planning is not done. Hence the best time to start investing is now and budding entrepreneurs and students should be financial planning (& tech) savvy for a better future.
To sum up, it is important to invest because we want to:
1. Grow Money
2. Retire Early (We all want this! I’m certainly not an exception here)
3. Reaching financial goals
4. Growing our business
5. Supporting family & friends
Stay tuned; in our next article we will discuss the various avenues available for investing and their pros and cons.
If you want to read more, here is a book suggestion:
The Intelligent Investor by Benjamin Graham