At the end of every calendar year, most of us have a similar new year’s resolution – prioritizing our health. While some choose to diet, follow health tips from celebrity nutritionists, I was simply lured in by the heavy discount offered by a gym in my vicinity. Although I was very excited to start my weight loss journey, the plan did not follow through. I was lazy or too busy or sometimes just simply lacked interest to even get out of my house; however, I would still check my weight every weekend hoping I had lost a few kilograms just because I went to the gym once a fortnight. The concept of savings and idea of investing is the same: only by saving you cannot beat inflation and maximize wealth in the long term. Your money also needs to work for you.
Savings
Savings is the amount of funds put aside for future from disposable income. There is no goal or plan attached to the employment of the funds saved. For individuals who are financially prudent, the amount of money left after accommodating personal expenses can be positive and further invested to generate a financially sustainable future.
Investment
An investment refers to the acquisition of an asset that has economic value and return generating potential. It is the process of using capital in order to make it grow. There is plethora of investment options available to suit every individual’s need and risk profile. Investments are dependent on an individual’s ability to save and the process of employing the funds in well suited vehicles.
Let’s understand the importance of investing with the help of an example below:
From the above example, we understand that the opportunity loss is very high and the benefits of investing outweigh the short term volatility for long term investors. Instead of safeguarding the entire corpus in low return generating products like savings bank or fixed deposits, it is more rewarding to invest the same in growth oriented products like mutual funds and equities that have the potential to beat inflation in the long run.
Conclusion
The stepping stone of wealth creation is savings. It primarily depends upon an individual’s level of income and willingness to save from the disposable income. However, savings alone cannot beat inflation in the long term. Only optimum mobilization of savings into befitting investment vehicles can help achieve your financial goals.
