We’ve spent most of our lives running around, getting things done right at the very last minute, haven’t we? We’ve been late to meetings and events, missed some of the best moments, and have several regrets.
Do we want to make those same mistakes when it comes to our futures?
I think not.
We’ve got so many goals to reach. We want to buy a car, own property, go on vacations, send our kids to the best educational institutions, and save for a comfortable retirement.
We’re also aware that achieving all this in one lifetime is not easy. At the back of our mind, we always think that we need more money in the bank to get the best out of life. So we work crazy hours, give up on simple pleasures and do so much more as we race against time in our efforts to save enough.
However, we don’t really have to sacrifice so much.
Time is friendlier than we think. In fact, if we’re smart about our savings, time is a very good friend.
Time works together with magic to make our money grow. The magic I’m talking about here is the magic of compounding. Its power is greater as time increases.
When we put our money in a savings account or a mutual fund, we earn some interest or return on it. This interest or return adds to our investment and in turn earns its own return. This cycle continues throughout the time we stay invested. So, if we had a fixed deposit earning 10 per cent interest, a deposit of Rs. 10,000 grows to Rs. 11,000 in the first year, to Rs. 12,100 in the second and Rs. 16,105 by the fifth.
So, the longer we stay invested, the more our money earns for us.
How we can be smart about our savings
When we keep our earnings in the bank, we earn an interest on it. We know it’s safe and there’s no chance we lose any money. But at the same time, there is a rise in prices of food, education, medical costs, entertainment, and everything else we spend on. Think about the money we spent on bread as a kid and the money we spend on it now. Chances are it has more than doubled. Price rise (inflation) through the years can’t be wished away, no matter how much we want otherwise. So, mere bank savings will not be enough.
We need to earn higher returns than what our bank savings account and fixed deposits offer us, if we want to beat inflation over the long-term.
We need to invest in equities because, in the long-term, that is the best asset class to deliver inflation-beating returns. And over time, we will be able to take the higher risk that comes with equities.
The safest way of investing in equities is through mutual funds. Investing in equity funds is much safer than investing directly in the stock markets. They are managed by experts who spread our money over a basket of stocks and actively change them around to stay with the best stocks, ensuring a fair amount of diversification while delivering good returns.
Look at these numbers. If we had invested Rs 1,00,000 in equity mutual funds five years ago, we would have close to double that today (Rs 1.9 lakh) on an average. If we had invested it 15 years ago, we would have around Rs 14.7 lakh! That’s what compounding and equity do when combined.
So, when we’re allowing time to work its magic, we can be even smarter and invest our money in the right place!
Talk to your investment advisor and make time your friend today.
The author Shweta Nichani is Creative Writer - Corporate Communications of FundsIndia.com