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Saving is just not enough, start investing
Saving is important. But for long term we need to do more
By Dhirendra Kumar | Oct 30, 2019
Historically, we have thought that Indians save very intensely and that they are very conservative spenders. Maybe that was in the past, but it is not necessarily true as of now. We are the beneficiaries of the way our parents saved but my sense is that Indians are no longer the kind of savers that they used to be earlier. There are a variety of reasons for why our parents save so intensely.
First, they did not have as many spending avenues and secondly, easy-credit and easy-loan were not available. Things have changed quite dramatically. Today you can buy everything and anything at your neighbourhood shop or at online shopping portals with sales and discounts which incentivise purchase with improvements in supply facilities. We have seen our parents waiting for their scooter, waiting for their car, and there could be many years of waiting before you could buy these. No longer so; today if you wish you can buy it even if you don't have money because you can always take a loan. So taking your phone, your car, TV or taking a house on EMI actually defers your investment because you are effectively mortgaging your future savings, your future income. So it takes some time for people to get started.
This is one problem, but I think everybody should really start appreciating what's going on and how injurious it could be for your financial future. One needs to overcome the problem of not being able to save and invest in the first place. But once you know you have started saving, then there are a lot of psychological issues surrounding how people think that saving itself may not be enough
Once you start saving money in your savings bank account, do you think that you have to wait for that money to accumulate to become some meaningful amount before you start investing? Once you start doing that, you make a fixed deposit or you go for something like a money back policy or some substitute which will be very low-yielding and you feel happy that something has happened. Many don't understand what is going on and also lack appreciation of compounding: the earlier you start, the greater and faster your money compounds. Most people think that these are small savings in the initial stages which is quite understandable because in the early stages of our career, we earn less and we have a lot of essential spending which consumes most of our earnings. So we end up with a very small surplus which looks so small that you think nothing meaningful can happen with it. But it is extremely important because the magic of compounding that can happen to your small amount could be quite astonishing.
In your formative years, developing this belief that you need to be at it because saving and investment is more a matter of habit and it has nothing to do with scale, is important. There are a lot of people who earn well but they say they don't invest, and there are a lot of people who don't earn so well but who are very disciplined about their savings and investments. So I think it's more a matter of attitude and a matter of habit and you should form that habit as early as possible.
It is not an easy thing to avoid all the procrastination and delays, because effectively what we are saying is that it's first saving wherein you are postponing your consumption to a future date and then investing, which has lot of excuses because most people think that the market is too high, you come across all kinds of jargon or you decide you want to have your money handy. All these reasons may be valid and realistic, but I think they mostly turn out to be an excuse which is unlikely to help you. That is because the more you delay, the bigger the opportunity loss.
I would like to give you some context to this. We are going to earn well and we are going to save, but if we don't really methodically compound our money we run a great possibility of outliving our savings. If your savings are not earning optimum returns, it is possible to invest even small sums of money methodically and regularly in a manner that will be very conducive to your savings behaviour. This ensures that your behaviour will not affect your investments, something that we have seen in the past wherein people have been seasonal investors. These people invest in a market when they are very high and they have generally been disappointed in the last two decades. Having closely tracked the market, I've seen that investors who came in large numbers in 1992 only lost money panicking or getting disappointed again in 1998 or as recently as 2008.
Earlier it was not possible to be very methodical with your equity investments, today it is possible. You can start with as low as 500 rupees. There are a lot of mental blocks that people have - that it requires large sums of money to invest and so on. It is no longer so. Getting started has become easy and there are very simple vehicles which will help you get on board. Today if you have never invested in the market or you have never taken a market-linked exposure through a mutual fund or anything, it is possible to start by doing your electronic-KYC (e-KYC). If you have your bank account, you don't have to visit anyone. You can go to any mutual fund company website and do your e-KYC that will enable you to get started. After that if you have an online bank account, you don't have to go anywhere to get started.
I suggest that anybody who is hard-pressed to even save must save a small amount to gain the full experience. Even if it's 500 rupee, you must do your SIP to just get a full circle experience of how to start and how to invest and that will be a great beginning for most investors because once you have done it, you will be able to demystify things yourself. I preach that it is easy, not difficult, that this is something you can do. But unless and until you step out and do things yourselves you will not be able to really appreciate what I am referring to. But by starting, you will be doing a great favour to yourself, you'll be doing a great thing for your children and this is not something which you can really procrastinate about and delay, because we are going to live longer and not having enough or outliving your savings is going to be one of the biggest risks that we will be facing in time.