My friend and I talked about this subject. Have we talked for hours about whether it's more important to invest or save money? We finally agreed on 5 main reasons why we should put more effort into investing. Today, I am required to talk to you about why you should invest your money instead of just letting it sit there.
The Idea of Money's Value in the Future
This is among the important money management ideas that everyone should know. In real life, the future value of money is the increase you will make if you invest a certain amount of money today at a certain interest rate for a certain amount of time.
On the other hand, if you don't invest it today, the inflation rate will harm how much you have. In simple terms, it means that the value of money changes over time. If you invest, it goes up, but if you don't, it goes down.
Let's use an example to show how this works: if you own INR 1000 and invest it today for a year at a 10% interest rate, you will have INR 1100 at the end of the year. On the other hand, if you don't invest it and just let it sit there, and inflation is 5%, the money will only be worth INR 950.
If you want to invest money, you can use the present value to figure out how much you require to invest now to reach certain financial goals.
P x (1+r x n) is the formula for calculating future value.
P is the amount you invested, r is the interest rate in decimal form (10% means 10/100 = 0.10), n is the number of years you invested, and FV/(1+r)n is the formula to figure out the present value.
Where FV is the amount of money you want to save, r is the interest rate in a decimal form discussed above, and n is the number of years you require to save. At first, this may seem hard to understand, but once you do, it will be the basis for your investment strategies.
Effects Of Inflation
For a country's economy to grow, there needs to be some inflation. For people, inflation means that things cost more. To fight the effects of inflation, we need to make sure our money grows in a way that doesn't make it hard for us to make important financial decisions because prices are rising.
To fight inflation, we need to understand a few things, like the current inflation rate and what we think it will be in the future. We also need to know how willing we are to take risks. The International Monetary Fund (IMF) is the most important organization with a database of information about inflation, GDP, and much more.
When deciding on an investment, pay attention to the interest and inflation rates to determine the absolute returns.
(Investment returns (nominal) - inflation rate = Absolute returns)
Tax Benefits
People worry about taxes because they don't know how to reduce their effects or because they think it's hard to understand. Tax money is taken from people both directly and indirectly by the government.
Individuals pay direct taxes based on how much money they make, while we all pay indirect taxes when we buy things and use services. Most investments are tax-free, so investing can help you save money on taxes. On tax-saving or tax-free investments, you have to pay a small amount or none.
Some of these investments are also made in government programs that help the public. From this point of view, you can get the most out of your money and pay the least direct taxes if you invest it wisely. You may have to pay more taxes if you don't use your savings.
Investments generate sources of passive income
It's always good to have more than one legal source of income so you can run a household and get ahead financially. You can open up many ways and streams of passive income through smart investments. Let's say you put your money in a mutual fund called a "monthly income plan" (MIP). Each month, on top of your regular income, you will start getting "deferred income."
This will make you feel like you can make more investments like this. Again, the investment will depend on your age, marital status, and willingness to take risks, so choose your investment program accordingly.
Increase domestic investments in the economy
Lastly, this is a purpose that helps the whole country's economy. If you maintain your money in a bank savings account, the bank will lend the money to businesses and let the money flow into the economy. But if you examine the economy, you'll see that stock markets are the heart of it.
Countries let foreign investors put money into their financial markets, but when things go wrong, these investors seem likely to pull out their money to cover their losses, which has a big effect on the stock markets. When domestic investment is higher, the markets will be more stable. Putting money into the markets makes them stronger and, in the long run, helps the economy.
Conclusion
From the reasons given above, it's clear that we should invest our money more than just let it sit there. On either hand, saving money is an important part of managing money. You should save money in case you need it in an emergency. This will help you focus more on long-term investments that you won't have to stop in the middle of. I'd love to hear your ideas and thoughts on this subject.
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