A salary hitting the bank account every month can be a wonderful moment. We spend 40-50+ hours working hard for 30-40 years in our lifetimes for something as simple as getting a salary that helps us become financially independent. A job gives us a salary and a sense of satisfaction, growth, and other psychological needs.
Many of us have heard a lot about the power of wealth creation via investing in equities, mutual funds, ETFs etc. But rarely does anyone talk about the negative impacts of not investing in these instruments. Let’s talk about bank accounts. They are probably the safest instruments to park money today. Unfortunately – most people tend to park their entire lifetime fortune in bank accounts. There’s no denying bank accounts keep money safe. But how does putting money bank account make you poor?
After all – people get 3-4% every year in savings accounts and up to 5-6% in fixed deposits today. That may not be super high returns – but it’s better than nothing. Then how does this make deposits poor?
The answer to this is inflation. Unfortunately, India tends to have one of the highest inflation rates in the world. Inflation matters to everyone – as prices of good services keep increasing every year.
Today, an average FD will give an investor post-tax returns of about 4-4.5%. Inflation, unfortunately, stands at 6%+. If you live in a metro city – inflation generally tends to be much higher. What this means is that money stuck in a bank account is eroding your wealth slowly.
Give it 10-15 years, and it will erode close to 20-30% of your purchasing power over time. If one looks at history -inflation rates have almost always been higher than what customers make in bank accounts. The way to counter this is to increase exposure to equity and other asset classes gradually. How does one do it?
1. Seek the help of a financial advisor – A good financial advisor can be a great way to start the journey into equity investing.
2. Invest first, spend later, save last – When getting the salary check, most people spend first and invest later. A better way would be to invest first (say 25% of the salary) and spend the rest. This ensures discipline and continuity.
3. Invest slowly – Investing slowly by setting a SIP can be a great way of minimizing volatility and slowly building an equity portfolio. Stick to diversified mutual funds for SIP investments.
4. Don’t know what to invest in? Start with index funds. They are simple, low cost and perform well over long periods.
5. Other asset classes historically, gold and real estate have also proven to be suitable investments to protect investors from inflation. Since gold is a more widely accepted asset – it makes sense for investors to own some of it.
6. Be careful with high-interest products: Many investors tend to be lured by high return debt products. Investors should know that higher returns mean higher risk. Sometimes, debt can be riskier than equity, and investors could stand to lose out on their entire capital in high risk debt instruments.
In conclusion, today, the biggest enemy for Indians is inflation. We must use equities and other asset classes such as gold and real estate to build wealth and fight inflation.
Remember – investing in equities requires long-term thinking, patience and the ability to wither short-term highs and lows in the stock market.
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