It’s a sin to keep money idle in your Bank Account

The best time to plant a tree was 20 years ago the second best time is now

… chinese saying

Most of us Indians are hard working middle income people trying to make our ends meet. If we could somehow learn to create a second line of income which could be proportional to our personal incomes, it could relieve us of a lot of mental and financial pressures.

We all have learnt or heard the power of savings. Only that people are unable to sometimes tell you exactly how much savings can lead to how much wealth. We try to quantify the savings in different instruments.

It is a common myth that only the rich can invest. Even the poorest with very low savings can do a great job if they invest wisely.

The Power of Compounding

Compound interest is the eighth wonder of the world.
He who understands it ...  earns it
He who doesn't … pays it.    

…. Albert Einstein








How often do we lazily leave our salaries or our incomes at our homes or in the bank accounts? Have you ever wondered why banks give salary accounts at zero balance? Have you ever wondered why it is not good business for most banks to give zero balance accounts otherwise?

The answer is simple. The money kept by you in your bank account is one of the cheapest source of cash for the banks. They pay a pittance in the interest on this sum. Around 3% maximum in most cases. The banks know well that if there are say 100 salary accounts, then at least 50 of these clients will keep the money in their bank account without withdrawing for a pretty long time. For the banks this is a gold mine.

If this is a profit for banks, whose loss is it? Of course; yours…

Scenario Wise study

Let’s take different scenarios of savings in the most popular instruments by people.

The chart below shows the profits earned from an investment of Rs. 1000

Investment	Tax (Assumed)	After 5 yrs	After 10 yrs
Savings Account(3%)	10%	Rs. 143	Rs. 310
Fixed Deposit  @8.5%	20%	Rs. 403	Rs. 1010
Gold @ Market Price	20%	Rs. 102	Rs. 947
PPF @ 8.5%	0%	Rs. 504	Rs. 1261
NIFTY @ Market Price	0%	Rs. 819	Rs. 1603
MF @ 15%	0	Rs. 1011	Rs. 3046

Assumptions/Data used:

Gold Price yr   2008 at Rs. 14200 2013 at Rs. 27500 2018 at 31000

Nifty:                July 2008 at 4093 July 2013 at 5857 July 2018 at 10211

Bank Savings

This is the most sureshot and lazy way of remaining poor. We should not park your money in the banks unless we need it in a very short time. Even for 6 months, you will be able to get some or the other fixed deposit.

Fixed Deposits

One of the most common financial instrument used for savings by most indian households. 25 years back we could find some banks offering as high as 13-14 percent interest rates, but that era is far behind us. Now the FD rates quote between 6-9% and are also adversely taxed for the rich. For the middle and low income tax is not a factor but the returns are not very high either. Should be done if your investment horizon is 1 year approx.

EQUITY

The data above clearly shows the benefits of investment in Equity. In 10 years our 1000 rupees in a good Mutual Fund will earn us a neat 3000 rupees. On the other hand keeping it lazily in our savings account is a sure shot way of squandering the opportunity and making a meagre Rs. 310. Be warned that equity investment is only for the people who can put their money for 5-10 years and there is no guarantee of positive returns in a shorter period of time.

The richest people in the world are heavily invested in Equities. The reason is obvious. They understand money. People who do not understand equities can invest in the Index Funds or Mutual funds.

PPF
For a middle income person below 10 lacs earnings it makes a lot of sense to invest in personal provident fund, PPF account. The biggest benefit is that they are tax free. They save you taxes in the current year. They also insulate you from any liability in the courts. They have a small disadvantage of lock in of money for a few years. It seems from various commentaries that government might increase the lock in period in the future.  Read for EEE investments.

GOLD

Theoretically, gold is a very bad investment. Most academicians make this assumption based on the returns in dollar terms. Indians have had a slight advantage of the falling rupee. So we have been able to make fair returns by investment in gold. In terms of our national economy, most of the gold is imported and is a huge liability for the economy. There is a major risk associated with the purity of gold. The purchase - sale gap for gold is high. Most small investors do not understand the purity and ways to check authenticity or the purity of the gold purchased.  You can circumvent that by gold ETFs.

Play like a BOSS

The power of compounding is another story which you might  want to read here. When we understand the power of compounding we will play for the long run and not for the short laps. We should diversify our savings in a way that we know our needs for the next 2-3 years and take investment calls accordingly. At a young age we can take more risks but as we age, our exposure to risky instruments should also decrease.