Financial Fix | Saving Decisions

By Irshad Mushtaq

It is crucial to acknowledge the importance of establishing saving habits early and making informed investment decisions in order to take advantage of the power of compounding. The accumulation of wealth through saving and investing can help to fulfill significant financial obligations such as funding higher education for children, covering the expenses of a daughter’s marriage, and providing for retirement income. Regrettably, contemporary society often prioritizes consumption, emphasizing luxury items and unnecessary spending on assets that depreciate in value, while also accumulating debt through credit card payments, loan installments, and various other forms of borrowing. This excessive spending not only increases financial strain but also negatively impacts long-term financial well-being. By comprehending the significance of saving and investing wisely, we can ensure that our assets are generating returns. For instance, land in Kashmir has historically provided double-digit annual returns through compounding, such as when the selling price of land in areas like Lal Bazar and Hyderpora increased from approximately Rs 10 lakh to Rs 2.50 crore over 20 years, which represents a 17.50% investment. In the year 2004 today, 2024, in gold, a historical return of 11.50% over 20 years makes the value 88.20 lakh, meaning 8 times. Bank fixed deposit, with an average return of 8.5% annually over 20 years, becomes 51.12 lakh (adjusted for inflation) – 5 times. So, it’s clear that in the bank 5 times, gold 8 times, and land 25 times. If money is not saved and spent on unnecessary things like loan EMIs and car loans, there will be a deficit in the future when it is needed to discharge liabilities. Hence, it is compulsory to always save at least 33% of total savings and invest this amount in appreciating assets before buying depreciating assets. It is crucial to understand which asset class can give us a return of 15% to 20% annually , for the next 10-20 years. The answer is simple: our investment in quality equity mutual funds, as the Indian economy is growing in terms of technology, government initiatives, infrastructure, artificial intelligence, and electric vehicles. One should start a SIP in mutual funds so that earnings should be at least 12% to 20% annually through compounding. For example, if someone saves 10,000 per month for 20 years, the total saving would be 24 lakhs. At a 15% annual return, it becomes 1.08 crores; at 18% per annum, it becomes 1.92 crores, and a one-time investment of 24 lakhs for the next 20 years at 18% becomes 6.57 crores (27 times in 20 years). If 15% annually, then 24 lakhs at 15% for 20 years becomes 3.92 crores(16 times).

It is imperative to prioritize saving at least 33% of our overall income. Additionally, we should aim for a double-digit annual return of 15-18%. By minimizing unnecessary loans on depreciating assets and carefully monitoring our spending, we can effectively maintain our financial well-being.

The writer is entrepreneur partner , M I Securities ,Sharekhan Email:[email protected]

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