What is investment? Build wealth in 5 easy steps
What is investment?
Hi, friends welcome to our blog. If you are thinking about investing too, then this article can help you. Before investing, it is important to know what is investment, and how it works, and how it happens.
Many peoples have thought investment is risky but it is not. If you do the investment in the right place at the right time, then it can give you very good returns.
You know that the investment is divided on the basis of risk. If you invest less risky then you get fewer returns. This type of investment is suitable for those people who do not like to take risks.
Let’s start knowing about What is investment ?
What is investment? Invest your hard-earned money in a proper way that can provide you with enough money in retired life so that you can spend your life comfortably even after retiring.
Friends, first you know the investment is not necessarily for retirement only. You can also invest in the education of your children, marriage, new house, and car.
Remember that, investing is a matter of a lifetime. This can be the result of years of savings and hard work you have put into it. So, before to invest you should prepare an efficient plan for good returns with low risk.
Before we understand why everyone should invest, we must also know what will happen if we do not invest.
I am trying to you understand this with the help of an example. Suppose you are earning 50,000 rupees every month right now. Out of which the cost of your living and other expenses is around 30,000 rupees, this means you spend ₹ 30,000 a month. So you are saving ₹ 20,000 every month.
You do not invest this remaining ₹ 20,000 anywhere but instead, you decide to keep it in cash with you.
Now the question is that if you save every month in the same way, then how much will you have till the time of retirement and the inflation rate till retirement.
You all know that inflation keeps increasing every year. With inflation, our household expenses are also increasing. Along with household expenses, our income also increases. So we try to understand it with a simple assumption.
- Suppose your income grows at a rate of 10% every year.
- On the other hand, your living and other expenses increase at an 8% growth rate.
- You are currently 30 years old and you want to retire at the age of 50. That means you will work for a total of 20 years.
- You will not like to do any kind of work after retiring. Almost all your expenses are fixed and no other expenses are expected.
- If you continuously deposit the balance of ₹ 20,000 in your bank’s savings accounts every month, then in the end how much money you will have.
- With the help of some easy calculations, you can understand that if you are earning ₹ 50,000 a month, then your annual income will be ₹ 600,000lakhs. (50,000per month * 12months = 600,000lakh)
- At the same time, if you spend ₹ 30,000 a month, then your annual expenditure is 360,000 rupees. (30,000per month * 12months = 360,000)
- At the same time, your monthly savings is Rs 20,000, then your annual savings is 240,000/-. (20,000per month * 12months = 240,000)
- In the second year, your income gets increased by 10%, so now you earn Rs 660,000 a year.
Another hand, your expenditure increases at the rate of 8%, now your annual expenditure increases to Rs 388,800.
It runs for the next 20 years, so your total figure is shown in the table below.
This number is quite scary. You accumulate only 1.7 crores after 20 years of hard work. At the same time, your expenses are fixed and your lifestyle has not changed in the last few years, you have probably suppressed your life aspirations too – like better homes, better cars, international holidays, etc.
Even after you retire, we believe that expenses will continue to grow at the rate of 8%, 1.7 crores are enough to sustain you in about 8 years of post-retirement life. You are likely to be in a very tight spot after the 8th year.
Now we see this example from the perspective of investment, now instead of keeping your savings idle, you choose to invest your cash which increases at the rate of 12% per year.
- For example, you decide to invest your 1-year savings of 240,000 and you invest it at a 12% increase for 19 years.
- At the same time, 271K savings of the second year are invested again at 12% for 18 years.
- At the end of 19 years, the investment of 240K first-year savings has now increased to 2,067,063 / -, increasing by 12%.
The table below helps you understand how the marks increase –
|Years||Income||Expense||Cash retained||Invest @ 12%|
Similarly, the investment of saving 271K for the second year increases to 2,085,519 / -.
In this way, you see how fast and how much the amount invested increases. If you take the final value of all these numbers, then you get a special amount of 4.2 crores at the end, which is 2.4 times more than the 1.7 crores you saved, it has become clear why the need to invest so much is.
Main reasons to invest
If you see, now you have three main reasons for investing.
You have 3 main reasons for starting an investment –
1. Fight inflation – This is one of the main reasons to invest so that you can win at rising inflation. You all know that inflation keeps increasing every year, due to which the prices of things you need increase, it is very important to invest to fight this inflation.
2. Build Wealth – You can also use the investment to make a good asset in the stipulated time. You can use this wealth in the education of your children, marriage, purchase of a home, retirement holidays, etc.
3. To fulfill the financial aspiration of life – At the same time, you can fulfill your dreams with the help of investment such as a better house, a better car, quality holidays to name a few.