Nov 22, 2010

Why do you need to invest?

I remember the day I got my first salary! I was so excited that I actually messed up twice while withdrawing it from the ATM. Finally after managing to withdraw it correctly I proceded home so as to very diligently hand it over to my parents (Remember the movies from the 70’s!) I remember my dad telling me, “Invest it wisely, don’t spend it unless you really have to.”
Now, if you have your first salary in your hands (yes, my parents gave it back to me), the last thing you have in your mind is thinking of ways to invest it wisely, right? Well 3 months down the line, post a few first salary treats, a new cell phone and “Oh-I-really-need-to-buy-this”, the only thing in my mind was – “Damn!! Where did all my money go??”
By the year end (i.e financial year-end ) my situation had improved a bit with a few stock investments. But, with the year end came the issue of filing my tax-returns and the thought of paying tax (from whatever little money that I had remaining with me), when I could have invested it and saved some tax, was really frustrating.
So, why do you need to invest??
Well, first and foremost it’s a must if you want to achieve your financial goals. Now this could range from buying a new cellphone to funding a Eurotrip or even buying a Bugatti Veyron EB 16.4!! Get this. Suppose you manage to save Rs.500 a month and invest the Rs.6000 you saved in the year in stocks, every year for 30 years and get 15% on it (which is the average return you can get by investing in stocks over a long period of time); your investment is now worth roughly Rs.26,00,000!! Well, its still not enough for the Bugatti Veyron EB 16.4 but definitely enough for a Volkswagon Beetle, the new cellphone and yes, don’t forget the Eurotrip!!
Obviously, as you get older you would be able to save more and invest more as you get financially stable. Increasing the Rs. 500 per month to just Rs.750 per month will give you Rs. 39,00,000! All this is possible because of the magic of compounding. The trick however is to give compounding more time to work its magic and to start investing as early as possible. More on this in the next blog.
Another very important reason for you to invest is to beat the inflation! Inflation is the phenomenon of rise in prices of various things, used by everyone in day to day life, over a period of time. I am sure most of you must have heard your parents telling you about the ridiculously low prices of everything during their time. Every few days we see inflation being the bread and butter for newspapers with stories about how prices of sugar, dal, milk etc. have increased considerably. What this means for us as investors is suppose you had Rs. 100 a few years back you would have been able to buy say 5-6 kgs of sugar. But today the same Rs.100 will buy you just 3-4 kg of sugar. The value or purchasing power of your money has just decreased! If you consider the inflation for the last 10 years, the average inflation comes out to be approximately 6.5%.  So, any investment which gives you 6.5% or lower returns is actually not giving you any returns!
So, to summarise you HAVE TO invest

And the best time to start investing is RIGHT NOW!! The sooner you start the better!!

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