We, Indians, are well-known for our ingenious thinking when it comes to handling money. We always try to assure our future by saving as much as we can. This mindset in itself showcases our mindset towards our financial knowledge and goals.
If your goal is to generate wealth but you don't understand how wealth generation works, it is going to hurt you in long run. If your ideology is to make money and then save it to spend on your dreams, it's simply not going to be enough to cater for your demands. Every month when you save money from your income, inflation is going to destroy all the effort that you put into generating that income.
Don't know what is inflation?
Inflation can be defined as the decline of purchasing power of a currency over time.
In layman terms, it means the value of our currency depreciates every year or the cost of items go up. In the last decade, the inflation rate in India has hovered around 5–6% and has seen worst levels of 10–12% during 2011–12. So what does this reflect in real-world numbers? Let's see this example-
Let’s assume, you can buy an earphone at ₹1000 in 2011 but instead of buying it in 2011, you are planning to save money for it to buy in 2014. Sounds good? No! Are you expecting the earphone to still cost the same? According to the general inflation data available, the earphone’s price would have increased to ₹1320. This is a 32% increase in cost.
Coming to 2021, if you are planning to buy something after 10 years, don’t save because what costs ₹1000 today will cost ₹1995 in 2030.
So, what should you do?
Start investing! You can prohibit your wealth from getting destroyed by smart investment decisions. The 2020s is not about how much income you generate. It is also not about how much are you saving. It is about how much are you investing.
Investing your money simply means putting your money to work for you.
If you start investing early in your life, you will reap the benefits of the power of compounding. As per the words of my financial mentor, Mr Ankur Warikoo:
“The power of compounding is the 8th wonder of the world.”
Let's see how the power of compounding works with this real-life example:
Let's say you invest ₹1000 in 2021 and it provides you 10% interest every year. So, what will the amount look like in 2022? It will be ₹1100 in 2022. And now you don't withdraw any amount from your investment and let it stay invested for one more year. How will it look like in 2023? Another addition of 10% of ₹1000? No, this time you will receive 10% on ₹1100 which translates to ₹1210. In 2024, you will receive 10% on ₹1210 which amounts to ₹1331. And it keeps on growing in a similar way and in 2030, it will be ₹2357.95.
Remember when I said the price of earphones which costs ₹1000 in 2021 will cost ₹1995 in 2030 due to inflation, now you can buy that easily with ₹362.95 to spare on other things if you will invest that money. Isn't it fascinating?
But…
There is a huge but in this analogy. Not every investment will help you generate wealth. If you don't make smart decisions, you might end up losing all of your wealth. Furthermore, there are a lot of commodities where you can invest but not all the commodities are able to provide you with good returns.
In my next blog post, I will describe all the means by which you can invest and what kind of investment will be right for you. Stay tuned till then. If you liked this blog, consider giving an upvote, if you learnt something new, share it among your peers.