Let your money talk

Your savings & investments on long term basis should be inflation-adjusted
Let your money talk
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I have been discussing money management skills in some of my previous columns. There are two things that may have kept many of us at bay for developing money saving skills. Either we were never really taught how to manage money, or maybe we simply avoid thinking about it because the situation is so dire.

In the present times, saving the right amount alone does not matter, but choosing the right investment option cannot be ignored if you really want your savings to multiply more efficiently. It's important here to understand that 'savings' and 'investment' are two different concepts. Let me explain. In the given culture coupled with our financial landscape, almost every one of us at our own level gets into money management activity every month. We distribute our monthly income which we earn either in the form of salary or business income, to fund our routine expenses like food, clothing, utility bills etc. After paying off expenses from the income, a portion of income is left and this is what we normally call, savings. The saved amount is always a reliable cushion for future needs. Thus, the more we save, the better.

In the given scenario when money is fast losing value and prices of goods & services goes up, creating wealth out of the money saved makes sense. It is worth mentioning that taking the route of a savings bank account is simply ‘savings’ and as good as keeping your money idle. It does earn you interest, but that is too low to help you to keep pace with the rising prices.

So, in contemporary times, saving alone is not enough. It's here 'investment' comes into play. For example, you save Rs. 5000 every month after making expenses towards your needs. If you keep this saved amount idle, over a period of time (say one year) you would find that the saved amount would not be enough to buy you enough things as it would have facilitated you a year ago. This means money loses value over a period of time, while prices of goods and services soar much faster than the value of money. This kind of mismatch necessitates that you let your money talk and multiply preferably at a pace much faster than the rising prices, precisely inflation. So, if you want to negotiate the cost of living, which goes up every year, then investing your saved money into profitable investment instruments is inevitable. Precisely, it's an investment which can lend you the help to create wealth.

In other words, you need to know how to make your money work for you. While being in office during normal working hours, sleeping, reading or having fun time with your family & friends, it is hypothetically impossible for you to multiply your money. But in these conditions too you can make your money talk. Quite simply, let your money be your extension. Once you allow your money to work for you, it will necessarily push your earnings up.

What are different modes of savings and investment?

In the banking sector we have a lot of saving schemes which not only guarantee assured earning on your money but also ensure safety. Here you can deposit a fixed sum for a fixed period of time suiting your own time limit. During the period you will earn interest on the deposit at a fixed interest rate. You also have an option to take the route of a scheme where you can deposit a fixed amount monthly for a fixed time and earn interest either at the end of the maturity of the deposited amount or receive the interest portion on a monthly basis.

Then we have a financial market where you can invest your money in equities and bonds. While entering into the capital market, work out three basic things: safety of the money invested, to get the money back as and when required (liquidity) and highest return on the investment. In this market, returns on investment are high, but so are the risks associated with your investment. However, you can mitigate these risks by investing in a variety of stocks. This means, distribute your money among a variety of stocks/shares that may rise and fall at different times. This way you will insulate yourself against those big "hits" that your entire investment portfolio could suffer when one class of stock is hit hard.

How rising prices, inflation, makes your money lose value?

Inflation plays an important role in planning your investments, especially those which are long term in nature. It may include your investment planning for children’s education etc. It’s noteworthy that the education and medical inflation is considered to be much higher than the general inflation.

So, the role of inflation should not be undermined. It’s the inflation which eats into the purchasing power of the rupee and devalues the repute over a period of time. To be precise, you cannot purchase the same quantity of things today with a particular amount than what you would have been able to buy some 5 or 10 years back.

Let me borrow an interesting calculation in this regard from an article published in the Mint, a reputed financial daily newspaper.

“Assuming an inflation rate of 5 per cent, the worth of Rs 1 crore after 15 years is about Rs 48 lakh! And, as the time horizon increases, the value falls further. After 20,25 and 30 years, the worth of Rs 1 crore will be about Rs 37.68 lakh, Rs 29.53 lakh and Rs 23.13 lakh respectively assuming an average inflation rate of 5 per cent.”

Meanwhile, government data reveals that the retail inflation in India has surged to 6.30 per cent in the month of May 2021. This is over and above the RBI threshold of 6 per cent.

So what’s the solution?

Your money management towards savings and investments needs to be in line with the inflation. In other words, it should be inflation-adjusted. For that, you have to inflate the cost of the goal and then arrive at the requirement. Thereafter, start SIP to save towards the inflated cost of the goal.

Here it is worth quoting an expert in money matters. “Let us say, after 20 years you want to send your child for higher education which costs Rs 15 lakh today. Assuming inflation of 7 per cent, the cost of the course may shoot up to Rs 40 lakh. So, start saving Rs 8000 every month to accumulate Rs 40 lakh ( not Rs 15 lakh) and achieve the goal comfortably.”

What about investment in real estate?

At our place the real estate sector has been among the most attractive investment vehicles for the margins it brings to the investors. It has outperformed almost all other investment options. However, most of our local real estate investors hardly realize that investment in this sector creates an asset form which has limited liquidity and is highly cash flow dependent.

We have a breed of raw investors, which overlooks risks associated with investment in the sector and are more into making not only quick but big bucks in a single deal. This situation has given many stories of these raw local investors falling in the trap of negative cash flow (when maintenance expenses outperform the income generated from the investment in property).

Meanwhile, in investment matters, investing in land is a very different ballgame. It’s a magical investment which can earn you huge margins in a single deal. But investing in land is not as simple as it appears. The first thing which an investor has to bear in mind is that there might be a series of legal requirements to meet and procedures to follow before a piece of land is converted into a saleable item. Let me explain – we have agricultural and non-agricultural land. As far as agricultural land is concerned, you cannot construct any kind of structure on it. It’s simply banned. For non agricultural, you still need clearance from the various authorities to build on it.

Don’t invest in land which is included in some other developmental plan drafted by the government. You can own the land but will have no right to do anything with it. Even, maybe, you cannot sell it.

Precisely, when you decide to invest in land, you should ensure that it has a clear title and is demarcated properly. Ensure that the land you own is not left unattended. Otherwise, there is the possibility of encroachments and would unnecessarily push you into legal issues. So to keep the land marketable, you should not overlook developing it further, even though it was already developed when you owned it.

Last but not the least. As stated by a well known real estate investor, Louis Glickman, ”The best investment on earth is earth."

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