Tag Archive : Savings vs Investments

What is Financial Freedom?

What Does Financial Freedom Mean To You?

Introduction

India is celebrating its 72nd Independence Day tomorrow on 15th August 2019. So Lets discuss about what is financial freedom or financial independence from personal finance perspective. What Does Financial Freedom Mean To You?

What is Financial Freedom?

  • As we all know, India got the freedom on 15th August 1947. This freedom was an outcome of sacrifices made by great leaders.
  • In the same context, for investors, financial freedom will come at the cost of years of savings and tactical investments to create wealth.
  • Financial independence is about taking ownership of your finances. You have a dependable cash flow that allows you to live the life you want. You aren’t worrying about how you’ll pay your bills or sudden expenses. And you aren’t burdened with a pile of debt.
  • It’s about recognizing that you need more money to pay down debt and maybe increasing your income with a side hustle – we’ll get to that in just a minute. It’s also about planning your long-term financial situation by actively saving for a rainy day or retirement.

Key Features of Financial Freedom vs Debt

What is Financial Freedom?
What is Financial Freedom?

What Does Financial Freedom Mean To You?

  • How about you being able to celebrate your own Independence Day or your Financial Independence Day to be more precise.
  • What Does Financial Freedom Mean To You? Does earning a big salary mean financial Freedom? In spite of having a high salary, why people many a times feel cash strapped when some emergency strikes? 
  • The answer is simple for those who understand the difference between income and wealth, and how to create it manage to be financially independent.
  • Also we need to value money for what it is and look at the money positively as an investment or savings than as a expense.
  • Income is merely the flow of money that enables you to meet your day to day expenses, provide for your living, some leisure and wants to be able to survive.
  • Whereas wealth is an outcome of what you do with the income and how well you accumulate and improve your financial strength to be able to sustain for a long term.
Financial Planning
Financial Independence and Investing
  • According to financial goals or objectives, Investing is the right way to achieve financial independence.
  • Apart from the traditional investment options, experts are of the view that equities alone can get you the financial independence.
  • Investing is not a one-time activity but more of a continuous process. The investment methodology will be different when you start investing in your 20’s and will change when you turn 40 and later on towards your retirement age, above 60’s.

Conclusion

In short, financial freedom is when you don’t have any kind of financial stress or any worries. Your investments are in the right place and are in a position working hard for you.

Example of Saving and investing

Saving vs Investing Explained with Example

Scenarios of Saving vs Investing

Introduction

In earlier article, we have seen what is difference between saving and investing. Let us compare the terms with the help of practical scenarios- Saving vs Investing Illustration, in this article.

Savings are usually put into the safest places or products that allow you to access your money at any time. Savings have almost zero risk of erosion and therefore the returns on savings are also extremely low. However, the term Investing is a disciplined and systematic approach to make your money work harder and compound into a larger corpus over a long period.

Saving vs Investing Illustration

Saving vs Investing Example
Saving vs Investing Example

Let us compare Saving and Investing with the help of numbers.

  • The usual pattern is people save money in their savings account and then put it into FDs even for their long term goals. When they feel a sizable amount has accumulated into their savings account they do an FD which is again a savings instrument. Once FD is done, they start all over again.
  • When they are looking forward to accumulate a sum in their savings account to make an FD, they simply miss to see the gains their money lying in their savings account could make.
  • Also their money erodes if inflation is greater than the post-tax returns offered by savings account.
  • Instead of just saving money regularly, they should invest in equity oriented funds regularly for their long term goals. For example, in Equity Linked Saving Schemes (ELSS) for the long term goals greater than 3 years, since ELSS funds have lock-in- period for 3 years. In ELSS funds, Long-Term Capital Gain (LTCG) is taxable @ 10% without indexation.

Saving vs Investing – Analysis of Returns

  1. From the above table you can see, same amount of money (Rs.6 Lacs) is being saved or invested in both the cases.
  2. But at the end of 6 years, the corpus difference is huge. It is around 1.53 lacs (3.13 Lacs – 1.6 Lacs). Returns with savings instruments is just Rs.1.6 Lacs in 6 yrs whereas through investing instruments (ELSS fund), it is 3.13 Lacs.
  3. Also, when your intension is to grow your money, you simply miss that. You have to pay taxes on interest earned through savings account and your FDs.
  4. Staying invested in equity mutual funds for more than a year invites Long-Term Capital Gains (LTCG) tax implications. LTCG Tax of 10% is applicable on gains exceeding Rs.1 Lac without Indexation benefit. Still, it serves as a better tool to build wealth over a longer period.

Summary

  • Understand your investment need and choose an instrument accordingly.
  • Go for saving instruments for short-term goals and use investing instruments for achieving long-term goals.
Why Saving and investing both are important?

Savings vs Investments

What Is the Difference Between Saving and Investing?

Introduction – Savings vs Investments

Saving and Investing are the two terms used interchangeably. Savings vs Investments are two different activities. Savings help in short-term financial goals, while Investments help in achieving long-term goals. Thus,they have different purposes and play different roles in your financial strategy making. It is very important to be clear on the fundamental concepts before you begin your journey of building wealth and finding financial independence.

Savings vs Investments
Savings vs Investments

What is Saving?

  • Saving is putting aside money left over after paying your monthly bills and liabilities into your drawer, savings account etc. Thus, we usually put savings into the safest places or products that allow you to access your money at any time. Savings have almost zero risk of erosion and therefore the returns on savings are also extremely low.
  • It gives no or negative returns (negative due to inflation). Post-tax returns from saving should beat the inflation so that it maintains its buying power and also generates returns over and above the inflation for building the wealth.
  • So, if saving just beats inflation, is it not good enough, well it is. But when? In the short term. When your objective is preserving your wealth for your short term goals (which are realizing within 3 years). In such case, you cannot afford to put all of money into asset classes which have high risk high return correlation like equity which can be volatile in the short term.
  • Savings account, liquid funds, FDs, post office schemes, Insurance plans, etc are savings instruments that meet the purpose of achieving short-term goals.

What IS Investing?

  • When we are talking about long term goals, we cannot simply rely on saving instruments. Here, the term Investing comes into the picture.
  • Investing is Putting your ‘Saved money’ into the avenues with an expectation of gaining post-tax positive returns well over and above the inflation so that you can build wealth.
  • We can achieve it by investing into Debt funds, Debt-oriented & Equity oriented hybrid funds, equity funds, pure equity, etc. In short, investing is letting your money generate more money.
  • Investing is a discipline and systematic approach to make your money work harder and compund into a larger corpus over a long period.

Why Saving Is Important?

Let us understand the critical role that savings play.

Why Savings Are Important?
Why Savings Are Important?
  • Savings are a must for your emergencies. You could lose your job, you may plan to start your own business or you may be hit by a medical emergency. In these circumstances you need liquidity and a liquidity back-up to fall back upon. That is why, it is always advisable to hold 5-6 months of your monthly earnings as liquid savings. In fact, it is the comfort of savings that allows you to invest more prolifically.
  • Secondly, the process of investing begins with savings. Let us first understand savings as the difference between earnings and expenses. Here is where the first steps towards wealth creation begin. You must not look at savings as the residual but look at expenses as a residual. As your income grows, keep raising your savings target and work your expenses accordingly. Out of the money you save, allocate a small portion to liquid assets like bank deposits and liquid funds and the rest to long term wealth creation. That is why savings are so important.
  • A good savings mix ensures that you do not have to break your investments at a future date unless the situation is absolutely demanding. Breaking your investments means that you miss out on future wealth compounding opportunities. Forced breaking of your investment could also have negative implications for your tax liability and to your long term goals pegged to these investments.

Investments Hold the Key to Your Future…!!

Investments bridge the gap between your goals and your current situation. Investing works on compounding principles and longer you stay invested, better it is. So here is why investments are so critical to your long term financial goals.

Why Investments Are Important?
Why Investments Are Important?
  • Over a long time frame, the risk inherent in investments tends to get neutralized and works in favour of the risk-return trade-off of these investments. Even on a risk-adjusted basis, these long term equity investments tend to be much safer and more prolific.
  • The investment in equity related products has two key advantages. Unlike debt, equity is best positioned to overcome the risk of inflation over a period of time. Secondly, a diversified product like a diversified equity fund is structured to capitalize on different economic cycles alternatively over a longer time frame.
  • Normally, financial planning begins with a conservative estimate of equity returns. Over the longer run, they actually tend to perform much better. That means, the funding gaps in your plan automatically gets taken care of. That is very important considering that quite often your outlays cannot keep pace with your rising needs. That is where compounding comes in handy and that is why investments actually matter!

%d bloggers like this: