Few words on Savings and Investments

Getting the basics right : Savings and Investments are usually misconstrued as synonyms - they are not. Simple terms - Savings is putting away a small portion of your income after ensuring that you have taken into account all your expenses, regularly, so that you have some money left in your hands should you run into rough weather. This is similar to the ants constantly working through the summer months to save up foodstuff well before the monsoon sets in. Investment is also money that has been put away after taking into account your expenses but this money is placed in a manner that it works on its own to grow. In other words it can be considered passive growth of wealth wherein you are not involved day to day in growing it. This also entails that utmost care is required in choosing the right kind of investments which in turn necessitates that a) one must follow a disciplined investment routine b) more importantly, we realize our needs and understand our goals so that we can have a good routine to achieve these ends and last but not the least c) our individual risk apetite meaning how much risk can we financially and psychologically withstand. Once clarity on these three points is achieved then we get to the serious business of planning both savings and investments. Return on savings may be small but it would be steady and comforting. Return on investments could be as high as 25% as in the case of realty or even higher in the case of some business activities, but may not always be steady inflow of return but an Investing discipline can help beat the woes of inflation and what better times to understand this than the present state of the economy.

It is my experience both past as well as present that often owing to the clouded understanding on these two aspects of finacial planning that many a times people are either under-insured or inappropriately insured. Also due to a faulty understanding of the basics of investing, many people are invested in stocks either at the wrong time (meaning when they should have switched their investments to fixed assets or simply been in cash) or are taking to the stocks and commodities markets in a hurry to make that elusive fast buck and then realize only too late that they were almost skinned in this misadventure.

There is a lot to go by a systematic investment discipline keeping in view the following :

a) of course, the total income of the household

b) the expenses that must be met

c) the surplus that they can hence put away

d) very important, the financial goals both short term as well as long term that the household needs to be planned for

e) planning for retirement so that people retire from regular jobs and not from the joy of living

f)planning for medical contingencies

In future posts I will continue to dwell upon each of the above points in order to shed more light on the subject.