Savings Means Losing Money
Welcome to the sixth edition of the Finconomist - The Finsnap Newsletter!
We hope you all enjoyed reading the previous editions as much as we did making them! (If you missed any of them, you can always find them at: www.finsnap.org!)
This time, we bring to you something "hatke" - why savings actually means losing your money! So get ready for another ride across the Finsnap Ocean - a plethora of fun personal finance principles, terms as well as digital tips!
Saving your money means you will lose it? How can that be true? But yes that’s precisely what it means.
Let me tell you about 2 of the fundamental aspects in finance whose positive and negative impacts respectively are the most ignored.
Positive : Compounding
Negative : Inflation
The impact of both these terms is so underrated despite the fact that Albert Einstein called Compounding the 8th wonder of the world and that Inflation is generally referred to as the biggest enemy to one’s financial fortunes.
While we all understand the broad meaning of these, how do these impact our savings and how can it mean that Saving means Losing!! Let’s deep dive a little bit…
What is compounding ?
In simple terms, it means earning interest on your interest. The longer you invest, the larger your return.
Start with investing a small amount (ex: 1000 bucks). You receive an interest amount ‘x’ , add this to the 1000 bucks. After some time you get interest on the new invested amount (1000+ x). On repetition of this process, you increase your initial amount exponentially, which is called compounding.
Why is this important for us teenagers?
Because by its very nature, the returns on compounding are directly proportional to the tenure of investment. Longer the tenure, better the returns. Hence earlier we start, better the returns!!
Okay, I understand, but how does Saving means losing money??
Let’s be frank….for most of us in schools and colleges, savings means putting money in wallets, piggy banks, with our parents or maybe for slightly evolved ones- even in saving bank accounts/FDs.
While saving is obviously better than spending that sum of money, that money in the piggy bank is actually losing value everyday due to the animal called Inflation!!
Inflation is nothing but the rate of increase in prices of the basket of goods that we buy i.e. purchasing power. For example: The stuff we can buy for Rs 50 has significantly reduced over last 5 years. Do you think that you will still be able to buy a choco shot from CCD 5 years later with just 50 rupees in hand? Probably not. And this is due to inflation.
Okay, I understand the problem but what’s the solution?
The solution is simple. Saving is reducing your purchasing power. Only investing can help you make returns that you can beat the inflation animal. So if you make more return per annum than the rate of increase in price of samosa, we can continue buying the same number of samosas 5 years later.
And that’s the simple solution.
So INVEST and not SAVE.
That’s okay, but where do I invest? Isn’t it too early? What if I do not have that much excess money?
It does not matter. The financial industry has been one of the biggest beneficiaries of the digital world we are living in. Just open an account with any digital wallet and make debt/equity or even digital gold investments (Needs parent guardianship till 18). So if you have excess Rs 100, just log in and buy gold, invest in Fixed deposit or even a mutual fund.
As they say:
It’s *not* about how much money you make.
It’s *not* about how much money you save.
It *is* about how much you invest.
If you make money and invest — instead of saving — you will have the money to stress less, do work you enjoy, and help others.
There’s a simple strategy that will change your financial life and you don’t need to be Warren Buffett to understand it – investments. Make use of it.
Now that you know about how savings is actually making you broke, go out there and start with investments! You’re now one step closer towards financial mindfulness!! P.S: Feel free to reach out to us if you want to talk about finance in a way that doesn’t put you to sleep. Or drop us a line saying hi!
Until next time; Adios, Amigo! Team Finsnap