How to Make Your Savings into Investments?
Income, less expenses, is saving. When Mrs. Rekha Sharma, called her financial planner to discuss the future of her children’s education and marriage, she informed him that she saves enough for her own retirement and wanted to understand how is her saving different from investment
Her financial planner explained to Mrs. Sharma that saving put to get returns, more than inflation, is investment. With inflation taken at 7 % today, her household expenses of Rs. 10,000/- per month, would become Rs. 38,600/- per month, 20 year from now and at her age 60, she would need Rs. 77.5 lakhs, if she wanted to have this monthly expense, increasing with inflation, coming to her every month from her age 60 till her age 80. This would need her to invest Rs. 7,840/- per month, from her current age 40 till her age 60. It was assumed further that the investment, before she retires, should give her returns of 12 % and after she retires, should be invested to give 9 % return.
Now, Rekha understood that what ever she is saving in her savings account for her own retirement, would not even get her half way through, as the current saving account return is only 5% and only if she starts “investing” the very same amount in a better return alternative, that, she could get around 12 %.
She now understood that saving is not the same as investing and how she can get her money to work better for her. She realised the importance of things getting expensive, called as “inflation” and how this big silent monster eats away her savings. She understood, the giant “investment”, which could “kill” the monster-inflation and bring joy and happiness to her and her family.
While she realised that her saving account getting her 5% return, is really with no risk and her financial advisor asking her to look for returns of 12 % over 20 years period was, in her opinion, was asking for too much risk, as she understood it initially. So, she started reading about risk versus return and what all investment opportunities were there to think and hence plan for her financial goals.
Saving for specific time bound goals with certain risk, is investment, Said Rekha to her colleagues at work. Working in a media house and looking well after her two children, Rekha learnt about the risk return of fixed deposits, PPF, pension plans, mutual funds and gold etc. and how each instrument could get her nearer to her goals. Goals, that need her savings to be regularly, like monthly, be invested and how she should have transparent, clear, no charge, investments. Investments which were in her own name and she could monitor them on regular intervals and if any investment was not up to the mark, could be stopped easily and perhaps redeemed to her bank account, without much hassle. This brought her more confidence and defined outlook towards her investment ideology.
10 years later, Rekha understood the important parameters of monitoring, control and risk return opportunities. Such avenues also brought her transparent and controlled investment, constantly linked to each goal and now her saving could be called as investment and without fears, many of her friends started taking her advice of planning their financially secured future. Her control over her finances and her achievements brought her more confidence to take greater risk and face newer challenges in career. Career, which was not a job any longer, as she knew, that after working for 20 years and with her past 10 years of investments, was leading her to a better, well planned financial life, wherein she could look for changing her job, if that job didn’t offer her the kind of money she wanted for her future goals. Goals, those were made on certain timelines and were well structured and planned well with her, with her financial planner. A financial planner, who never sold her any product centric investments, but always gave her unbiased opinion. He gave her ideas like taking pure insurance and adequate insurance on her own life and do only insurance (not investment linked) from an insurance company. Even her health insurance, critical illness covers and accident coverage’s were adequately planned. She had the right amount of (6 months expenses) contingency fund in place. Her investments were tuned to get returns which were tax efficient. Investments, which were now giving her more than the inflation and tuned to her risk appetite. She also made her will as she realised her house, car, bank locker and also loans, needed her written explicit approvals and her nominees know well what is to be done, should anything happens to her.
With these colours filled in her life, Rekha realized on that she had filled her life with adequate colours. Colours to bring her joy, happiness and satisfaction, guaranteed for life. Life, which otherwise meant, black and white images, could also be colored well with these colours of life, also. True happiness.