Unlocking the Power of Investing: Your Path to Financial Freedom

Have you ever heard the saying "Cash is trash"? It might sound absurd, but it makes a lot more sense than you think. Cash is referred to here as money (whether physical or digital), which is kept idle. This means that the money does not have the potential to generate any returns for you.

The Silent Thief

Counterintuitively, the money kept idle is not retaining its value either, as it is depreciating in value each year due to the effect of inflation. Inflation is a general increase in the prices of goods in an economy over the course of a year. For instance, the average inflation calculated in India in 2022 was 6.5%, meaning that goods that costed Rs. 100 previously cost Rs. 106.5 (on average) by the end of the year. Hence, the buying power of your 100 rupees has decreased. We can observe it in real life too; take your grocery bills and compare them to a year ago, and they should have increased.

One year might not make much of a difference, but in the long run, inflation eats money like termites. For example, Rs. 50,000 would be enough to buy a Maruti 800 in 1983. In 2023, 50,000 people can't even buy a good two-wheeler. Its nominal value is still 50,000, but the real value (buying power) has decreased. That is alarming for anybody, as our money is losing its value day by day. If you invest your money, you will keep well ahead of inflation and be able to grow the value of your money. However, if you don't invest, neither your savings nor your income will keep up. Basically, you would pay more for the things you buy (such food, gas, and housing), and your income will not increase at the same pace. 

Passive Income

"If your salary is your only income, you are one step away from poverty"

- Warren Buffet.

An individual starting their career will want to build a large retirement corpus to achieve financial freedom. We might have wants that we want to fulfill later in our lives, like buying a house or car or travelling the world. Later in life, we might have other responsibilities like to pay for our children's education and marriage. To achieve these goals, one income stream can't always work, and a passive income stream is required. As our expenses are rising each year, it is inevitable to grow your income also to survive.

Building more income streams is essential for financial freedom and investing is a great way to build passive income, where you actively don't have to do any work but your money does the work for you. For example, Nifty 50, the benchmark index for stock market in India gave 12% annual return for last 20 years. This 12% return is your profit and is like a second income stream you earn each year. Investing makes us ready for our future and provides financial stability to meet our monetary requirements to live life comfortably.

Confounding Compounding

It is recommended to start investing as early as possible to reap the maximum benefits. Consider the following scenario: Two people are involved. Person A invested some money at age 20, while Person B invested the same amount at age 25 in the same fund that gave a 15% return every year. They both retired at the age of 60. If we keep the return constant until they both retire, mathematically, Person A will have twice as much money as Person B, despite only a 5-year difference! This is due to compounding.

Compounding, in basic terms, is when the interest earned on an investment gets reinvested into the principal amount. Thus, as the principal amount gets larger, the interest earned also gets larger each year; thus, an exponential growth happens. Suppose a person invests 100 rupees; a 15% return on it means the amount will become 115 after 1 year (a growth of Rs. 15). Another 15% now results in 132.25( 17.25 rupees of growth), and the cycle keeps repeating as long as your investments perform well. Thus, the interest earned also increases with time. That is why it is said that the longer you stay invested, the more returns you can expect.

Investing requires as little money as buying a "Burger"

Doesn't investing require huge initial capital? No. One can start investing with small amount also and gradually increase the investment as their savings increase. This is a very common misconception keeping people away from investing that a small capital will not make any difference. In reality, consistency is the key. Investing does need you to allocate some amount of money from your income, but it can begin with any amount. If one does it consistently and for a long period of time, the results will show up.

To put it into perspective, you can consider the 15-15-15 rule. This financial rule says if you invest 15,000 diligently every month for 15 years at a 15% annual rate of return, you will have an investment value of 1 crore! The more interesting part is that your invested money will only be 27 lakhs; the other 73 lakhs will be your profit. Even 15,000 can make you a crorepati in 15 years; hence, a smaller amount is perfectly fine to start off with and then grow your investment gradually.

Risk appetite

When you are young, you have the chance to take more risks than at a later stage in life. You don't have many necessities, and life can be lived frugally. You don't have to bear the responsibility of children or a spouse. Hence, you can take more risk with your money to earn more reward. Your financial responsibilities are lower at this age, so it is advisable to invest in a riskier asset. A major portion of your investment portfolio can be devoted to equity (stocks) and a greater return can be expected. Even if you make mistakes with your investments, you will have sufficient time to recover in the future and regain stability.

It's never been easier to invest

There are so many investment options in 2023 easily available at a click of a button. It is easier than ever to invest in stock market now with online brokers rising in popularity. Online brokers, such as Zerodha, Upstox, Angel Broking etc. are websites that help you open a demat account from which trading of stocks happen from the market, all in digital format. Trading stocks can literally happen at a click of a button and the profits will be credited to your bank account in seconds. Likewise, investing in mutual funds happen in similar way from online brokers like these. If you want to buy gold, 3 different forms of gold is available to invest: physical gold (jewellery), gold ETFs, sovereign gold bonds). Real estate can be bought through an asset called REITS. Cryptocurrency is also gaining a lot of popularity with its high risk high reward nature. We will cover more about asset classes in the future.

Bottomline

Start your investment process now if you haven't already. Investing is not a choice, it has become a necessity to become financially independent. Wealth creation is a long-term process with no shortcuts. Start small, keep it simple, and learn as you progress. Gain more knowledge about managing personal finances and remember that it is never too late to start investing and as an investor, your most valuable asset is time!

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