Why Investing is Better than Saving
Over the years, there has been a lot of talks about the best way to grow your money. While some consider stocks to be the best option to invest money safely, others favour government bonds and similar assets, and so on. One thing that almost everyone seems to agree upon is that saving is certainly not the best way to make your money grow. Let’s find out why.
What is Saving? How is it Different from Investing?
Saving is when you save your money in cash in a locker or in a bank account or someplace else, usually with no particular purpose. The idea is to keep saving a part of your earnings for future use. For example, whenever you get some extra cash, you put it in a money jar, just so that the money is saved and not unnecessarily spent.
Now, this may sound like a nice thing to do, but it’s certainly not the best thing you can do with your money.
Saving is definitely a good habit. You must save as much as you can from your income. But, instead of holding the cash in a locker or bank account, you should invest it in a growing asset. Why? In one word, the answer is -
Inflation is the decline in the value of money. Over time, the money loses its purchasing power. In simple words, something that you can buy with INR 100 today will cost must more, say, 10 years later. So, if you are saving with the hope to buy something, like a car, say, 10 years later, you’ll need much more money than what you need today.
Now, the thing with saving is that it doesn’t really grow your money. Even if you are saving in a bank account, you’ll typically earn an annual interest of 2–3%. But, did you know that the average annual inflation rate is about 5–6%? That means your money is losing about 5–6% of its value automatically every year, while your saving accounts is only compensating for 2–3% of it.
To sum up, you need to put your money into an asset that grows at an annual rate higher than inflation. This is called investing.
What is Investing?
Investing is when you put your money in growth assets so that the value of your money increases, and doesn’t decrease, with time.
There are many options and assets you can invest in with the assurance of returns higher than inflation. Some of the most popular investment options in India include -
- Fixed deposit — 5–6% yearly returns
- Gold — 9–10%
- Debt mutual funds — 7–10%
- Equity mutual funds — 11–15%
- Real estate — 10% to no upper limit
- Stocks — 15% to no upper limit
- Bonds — 7–10%
- Government schemes — PPF, NPS, SSY, etc. — 6–8%
- Cryptocurrency — 30–40% to no upper limit
Different investment options have different risk levels. For example, debt mutual funds are less riskier than equity mutual funds. Similarly, govt bonds with fixed returns are less riskier than stocks. So, the best thing to do is understand and evaluate your risk profile and then invest in the most suitable assets to meet your risk criteria and goals.
Crypto trading is the latest trend in the investing space. As we have seen in the past decade, investing in cryptocurrencies can give much higher returns than any traditional assets. Bitcoin, for example, has grown by over 30,000% in the last 10 years or so. However, cryptocurrencies are highly volatile and this is a very high-risk investment option. So, do your research before investing in digital assets and invest only what you can afford to lose.
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