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  1. Don’t let your money lie idle

Don’t let your money lie idle

All investments involve some amount of risk, but not investing at all poses greater risk to capital

By: | Updated: January 13, 2015 6:08 PM

If earning and savings are important in financial planning, so is the need to invest. Quite often, young men and women in early 30’s say they do not have enough money to invest. It is hard to believe. Everyone has enough money to start investing as long as one makes it a priority.

Unfortunately, most people at this age do not make investment a priority because they don’t really understand how investing can help them in a long run.

Sometimes, you may have more money than you would want to spend; at times, you may want to purchase more than you can afford. These imbalances will lead you either to borrow or to save to maximise benefits on your income in the long-run. When current income exceeds consumption needs, people tend to save in excess. They can do any of several things with these savings like put money under a mattress or bury it in the backyard until the time when consumption desires exceed current income.

When they retrieve their savings from the mattress or backyard, they have the same amount they saved.

Another possibility is that they can give up the immediate possession of these savings for a larger amount in the future. This tradeoff at presents consumption for a higher level of future consumption is the reason for savings.

Why invest?

A big question, however, is why do you need to invest. There could be various responses.

To make your money earn for you

What do you need to do with the savings to increase them over time? Those who give up immediate possession of savings (that is, defer consumption) expect to receive in the future a greater amount than what they give up. Conversely, those who consume more than their current income (that is, borrow) must be willing to pay back in the future more than they borrowed. The rate of exchange between future consumption (future rupee) and current consumption (current rupee) is the pure rate of interest.

In other words, someone pays you to use your money for a period of time. You then get your money back with interest. If you have bought shares in a company that may yield you dividends. Now your money is making money.

For financial control of your life

If you don’t start thinking about money when you are young, you are likely to to get trapped into living beyond your means. Everyone needs to understand his financial position to decide how much to spend, how much to save and how much to invest? Priorities need to be fixed. Savings must be the top priority.

Financial independence

It is not advisable to depend on other people beyond an age and therefore, it makes sense to take care of your financial health. In West, financial independence is part and parcel of the lifestyle, whereas in India, until a boy or a girl obtains an employable degree, parents take care of their child’s finance. It is not a matter of concern what you do for work as long as the work respects the law of the land. One must be financially independent beyond an age.

To avail tax benefits

As per the announcements by the government from time to time, certain investments in bonds and related instruments offer tax rebates and other benefits. These tax benefits differ every year and are governed by the laws subject to changes. While tax benefits may prove important to some investors, for others it may not be a concern. But by and large, investing in the specified instruments, which will lead to tax rebate, is a point to be considered while investing.

To attain your goals

Whether your plan to buy a new house, a new car or set off on a world tour, this is your motivation to invest. Many people are not driven by a need to simply earn money for the sake of earning. Investing feels a lot more rewarding when you have a goal at back of your mind, and you can make things happen over and above what is available to your pay cheque and bonuses.

The action of not investing is already a risk to your capital. But, all kind of investments involve some amount of risk. If you propose to buy securities such as shares, bonds or mutual funds, you would need to do certain homework and make sure you understand the concepts of investing. The reward for taking on risk is the potential for a greater investment return. The reasons for investing will change as one go through the ups and downs of life, however investing is an important aspect of every individuals life.

Risk reward:

* Those who give up immediate possession of savings (defer consumption), they expect a greater amount than what they give up.
* Everyone must understand his financial position to decide how much to spend, save and invest. Priorities must be fixed. Savings must be the top priority
* It does not matter what you do to earn as long as the work respects the law of the land. One must be financially independent beyond an age
* Investing becomes more rewarding when you have a goal at the back of your mind

The writer is associate professor of finance and accounting at IIM-Shillong

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