World Savings Day: Why Saving Is Not Enough
Simply saving is an unproductive exercise if you don't compound it by investing
The importance of saving money regularly cannot be overstated. It is the first step to money management to build a safety net for emergencies and achieve financial goals without the need to borrow.
Every year, 31 October is observed as World Savings Day to promote the importance of saving money and create awareness.
But, saving alone is not enough, say experts.
“Saving money is the first step to grow your money. But, simply saving is an unproductive exercise. To create wealth, investors should go further and invest that saving,” says Priya Sunder, director and co-founder, Peak Alpha Investment.
This World Savings Day, we tell you why saving is not enough for financial success, if not invested.
Saving in Fixed Deposits Not Enough
Indians are traditionally seen as ardent savers. Though the overall savings rate in Indian households has decreased in the last 5-6 years, as much as 55 per cent of working Indians are habitual savers for their long-term goal of retirement, as per the Aegon Retirement Readiness Index (ARRI) 2018.
In another survey on women investors conducted by Scripbox, an online investment platform, about 80 per cent of the total respondents report to be disciplined with their savings. But, nearly 58 per cent among the 80 per cent women respondents admitted to shy away from investing and park their money in fixed deposits, recurring deposit, public provident fund or bank account.
Experts say that in spite of disciplined saving, investors may not achieve their future financial goals by sticking to the safety of deposits and savings account. “Saving and investing are two sides of the same coin and often used interchangeably. However, there’s a big difference in what each delivers. Savings is money set aside for emergencies, which offer minimal or no rate of return. Investments, on the other hand, are a systematic approach to wealth creation,” says Ashok Kumar E.R., CEO and co-founder, Scripbox.
Value Erode Over the Long Term
Inflation poses the biggest threat to your money in the long term. “Post-tax returns on traditional investments such as fixed deposit are less than the inflation rate. If your savings earn less than the inflation, value of your savings will steadily decline over time,” says Sousthav Chakrabarty, CEO and co-founder, Capital Quotient, a SEBI-certified financial advisory firm.
Fixed deposit or savings account can help fulfill goals that are only one-two years away but prove to be insufficient for long-term goals such as retirement or buying a house.
Apart from inflation, tax, unplanned outflows and unexpected emergencies are some of the other factors that can destroy savings if not adequately invested. “A disproportionate increase in lifestyle relative to earnings can also diminish savings over time,” points out Sunder.
Low Returns Mean Higher Saving
One of the downsides of investing in low-yield instruments is that you have to stash away bigger amounts to accumulate the desired corpus for various goals. “Money saved but not invested would mean lower returns. This, in turn, means that the investor needs to target a higher savings rate,” says Rohit Shah, founder and CEO, Getting you Rich.
This practice can affect one’s purchasing power as there will be lesser disposable income for spending. “Though saving is a good habit, excessive saving by smothering one’s aspirations can get frustrating” adds Shah. Also, if you increase savings towards a particular goal to make up for a shortfall, you may compromise on other goals.
Moreover, financial planners say that they have seen a decline in savings rate over the years due to increased spending. “Previous generations spent 30 per cent of what they earned and saved the remaining 70 per cent. Today, it is the other way around as financial goals have changed and aspirations have increased rapidly. Leaving money as cash, in the bank account or even in a fixed deposit is not going to cut it today,” says Kumar.
Don’t Just Save, Compound Money
Pressing on the importance of long-term investing, Shah says, “One has to methodically compound their money over time by investing and re-investing to ensure that they don’t outlive their savings.” Chakrabarty concurs. “Wealth can rapidly snowball through compounding. But, one will have to invest for the long term to harness the power of compounding,” he says.
Compounding is basically earning interest on the returns or interest already earned till then.
These days, mutual funds let investors start investing with as little as INR 500 per month. You can automate your savings by starting a systematic investment plan (SIP) in a mutual fund. “It is wise to make a budget, spend what is left after covering the basic expenses and savings. That way, you will save (and invest) regularly and spend without worrying. Starting a SIP is a good way to do this,” says Kumar.
The only way to grow your money is to invest it in a mix of financial products as per your risk appetite and investment horizon. However, don’t blindly chase returns. Stick to asset allocation to effectively balance risk and reward in your investment portfolio.