Importance of Systemic Savings and Investments

A small savings each month, if invested properly for a long period of time can accumulate a significant amount of wealth.

Sounds simple. Isn't it?

So let's break this sentence, so that you can apply this principle in your life with whatever little or huge amount of money you have (or, more precisely, you manage to save).

1. Discipline and importance of savings:

Almost all of us know the importance of savings but only a few of us have the required courage to save by delaying our 'instant gratification' by spending in useless things.

So building a strong habit of saving is important as saving enables you to have the required capital to start investing. 

Now, the question arises-How to save and how much to save?

Let's consider, you are earning, let's say I rupees per month( if you are earning more than great) and your total expenses of the month is E so you have (I-E) saved. Now, what you should do with saved money is to build an emergency fund of at least 6 months of your expenses. Once built that emergency fund then think of investing.

2. Why should you invest?

In India, the average rate of inflation (decrement in purchasing ability of money) has been 6-7% per year. So your primary target should be investing in such a class of assets whose rate of returns exceeds the inflation rate - that way only you are gaining money. Otherwise, unintuitively you are losing money. Let's understand this through an example:

Suppose you have 100 rupees to buy a good/ service today. And you delayed your purchase and kept the money as cash. One year later you go to buy the same thing but because of inflation the price of the good has advanced to 105. So the purchasing power of your money shrinked. So that is how inflation eats away our savings if it is not invested in such financial assets which beats inflation.

3. Where to invest?

Suppose you have made your mind to invest. Now, the biggest challenge is where, when and what amount to invest. The answer to these three questions depends on your knowledge, risk-profile, motivation and your goal. But one rule of thumb should be investing only that amount you are comfortable with and the return of the investment must exceed the rate of inflation. A SIP plan brings the required discipline in the process.

4. Systematic Investment Process:

It's the process in which we invest a fixed amount of money in any asset class you like, at a fixed interval of time (monthly, quarterly, yearly etc.) This brings a discipline to put your saved money to work. 

A Case Study:

Scenario: 

You are in your twenties or early thirties. So most probably you have around 30 years to invest.

So you invest 1000 rupees per month. And increase the SIP amount by 10% each year for the next 30 years. And your investment also grows by 10% per year. Let's calculate what amount of wealth you will accumulate at the time of your retirement. 

Looks impressive.

The process of compounding slows down when you start late. The best time to start investing is in your 20's. So what are you waiting for to start investing?