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MONEY TRAP - 19 : Considering Savings As Wealth Creation

    Mr. C.S. Sudheer | Tuesday, July 19,2016, 06:51 PM
 

This is one great saying “Wealth is the slave of a wise man. The master of a fool”. You want to build wealth and grow rich. But do you know what wealth means? If your answer to this question is No…..It’s better you first learn what wealth means. You own assets such as a house…stocks….gold jewelry…plot of land….apartment. The total value of these assets you own is called wealth. You save money regularly each month, which you set aside for an emergency? Is this wealth? Money is money after all. Why should your savings not be wealth? Want to learn the art of wealth creation? Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Saving is not wealth creation

You earn a good salary. In spite of this you are able to save nothing. You vow to do something about this. Of what use is working, if there is no money left at the end of the month? You prepare a budget which gives an idea of your income and expenses. The budget helps you control expenses. You are now able to save some money. You are on the path to wealth, or are you? Let’s find out by reading this simple story.

Karan who is 25 years old, works for a travel agency. He earns a decent salary. Karan has just been married and finds expenses too hot to handle. Karan checks his bank account at the end of the month and always finds it nearly empty. Karan is just not able to save money. His wife Sujata, comes up with an excellent suggestion. What about making a budget to get an idea of spending and then control it? Following this budget, Karan is now able to save money and is very happy. Karan believes that saving is wealth creation. He will soon be a rich man. But Karan is wrong in his assumption that saving is wealth creation.  Why is Karan wrong?

Saving and investing though used interchangeably, are different. Saving is simply setting aside a part of your money. This money can then be used in an emergency, when you need money in a hurry and well….nobody is willing to lend money to you. Now saving money does not increase your wealth. It has nothing to do with wealth creation. Investing has everything to do with wealth creation. Investing means putting the money you save into a financial product. You earn returns on this money, depending on the investment decisions you make. Good returns make you wealthy indeed.

You consider saving as wealth creation

Your savings help you survive a rainy day. The money you set aside as savings, comes to your aid in an emergency. If you are young and unmarried, you need to have at least 3 months worth of living expenses in your emergency fund. If you are married, you need to have at least 6 months worth of living expenses in your emergency fund. What happens if you only save your money and do not invest? Before this question is answered, let’s take a look at some of your financial goals, where you need to decide, whether you must save or invest. Saving is collecting money in small amounts until it becomes a lump sum. This money is then used to go on a holiday, make a deposit on your house or even buy a car. If you need your money to grow to meet a major financial goal, then you have no choice but to invest. You need to invest to meet a financial goal such as money for your child’s wedding and a comfortable retirement for you.

Thumb Rule to decide when to save and when to invest

  • If you need the money in under 5 years…Save
  • If you need the money more than 10 years in the future….Invest

Time to understand what happens if you consider saving as wealth creation, through a simple story.

Ajay and Prashanth both 23 years of age, were classmates in a reputed engineering college and also good friends. They were both studying computer engineering and their aim….To be very good computer engineers….Ajay and Prashanth graduated with good marks and were placed in reputed IT Firms. Ajay and Prashanth both earned INR 5 Lakhs a year.

Ajay was a very good saver. He hardly spent any money on parties and eating out. Any opportunity he got….he saved money. This money was lying in his savings bank account. Ajay believed that saving was wealth creation. This was the path to wealth. Prashanth on the other hand did spend money on himself, but instead of leaving the money he saved, lying in a savings bank account, he invested this money. Prashanth invested part of the money he saved in equity mutual funds. An investment in equity mutual funds is risky, but gives high returns. Prashanth was just 24 years when he started investing in equity mutual funds. It is good to start investing in equity, when you are young and start earning. After marriage, responsibilities and expenses increase. You need to stay invested in equity for at least 3 years or more, to enjoy good returns on your investment. Prashanth knew that investing in equity was risky and wisely invested the remaining money in fixed deposits, PPF and post office deposits. Wise investing soon yielded good returns. In a few years time, Prashanth was able to buy a brand new car. One day Ajay visited Prashanth and was surprised to see his new car. Ajay asked him “You hardly save any money. How can you afford this new car”. Prashanth replied “Yes, it’s true that you save more money than I do. But I invest the little money I save, wisely. That’s why today I drive a car”.

What do you learn from Ajay’s mistake? Ajay saved money which he left lying in his saving bank account. A saving bank account gives only 4 % interest a year. Ajay had money to meet emergency needs, but this money could not create wealth. The path to wealth creation is investing and building assets of value. Prashanth realized this and invested his money wisely. Prashanth focused on building assets which had value. Prashanth had discovered the secret of wealth creation and would soon be a rich man.

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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