The pursuit of happiness is not just about money. That is perhaps the reason why most Indians are satisfied with a focus on savings rather than investment. Your investments that beat inflation create wealth, not your savings. For most of you, the money lies in bank deposits, real estate, and gold. That has much to do with not understanding the difference between savings and investing.
There is a lot of misinformation. Elders in the family talk about fixed deposits and gold in the same breath as mutual funds and equity assets. Very few differentiate between savings and investing. For many, they are the same. However, saving money is just the first step in your financial journey. Investing follows when you learn the way to create a monthly surplus consistently.
Your savings are for immediate needs, which must evolve into investments to meet your long-term goals. When you figure that out, you can steer clear of the confusion.
Financial goals
Once you master the art of saving more money than you spend each month and creating a surplus, you can start putting it to work. Your journey into the world of investing begins with setting up financial goals.
If you need money for a car or a holiday in a year or two, you must put it in a fixed deposit or a liquid mutual fund. The idea is to protect your capital at all costs and not lose money. You need that money for a purpose, and it better be there when the time comes. As a result, you cannot commit it to equity assets.
Investing in stocks or equity assets directly or through mutual funds should be your choice only when you are prepared to give it time. You should put only that money into equity markets you do not need now. Your retirement savings must stay invested for 25 years to give you the benefit of the power of compounding. The longer you stay invested, the better from a wealth creation standpoint.
Your financial goals determine the direction you give to your money. Your money is a saving if it caters to short-term goals. It is an investment if it is for a long-term goal.
Wealth creation
The purpose of all actions you take related to your money is to ensure you create enough wealth to look after yourself and your family. Your savings will merely protect your wealth. You cannot create wealth by merely saving your money in gold or owning physical assets. Wealth creation is possible only when your investment beats inflation. The value of your money grows only when it is higher than inflation.
There is adequate data that shows equity assets generate a higher return over 20-25 years. Despite that, most of you choose to own physical assets like gold or property. There is nothing wrong with that since it is a choice you make. However, looking at your fancy for gold and real estate from the prism of savings and investment is essential. You need an appropriate asset allocation plan to ensure a proper balance between the money you need for multiple financial goals. You need to figure that out if you are familiar with finance. If you are not, you need help from a professional advisor.
Engaging a financial advisor is the most prudent step in investing. Your conversations with the financial advisor will help you underline the difference between savings and investments. Professional help makes sense if you do not want to do the reading yourself. Personal finance can get complex for those who do not work in finance. You need to understand the impact of interest rates and inflation on your money. You also need to understand the returns of your investments over and above inflation. That interplay affects your future wealth in more ways than you think.