Saving is undoubtedly the first step to building wealth. However, your savings alone cannot fulfil your dreams of travelling around the world or owning a home in your favourite locality. You must make your money work harder for you – hard enough to ensure that your wealth grows at a faster pace than inflation.
And this is exactly what investing smart is all about. Google search data indicates that queries about navigating uncertain financial times while being able to enjoy the little luxuries of life have significantly increased since the pandemic. On the one hand, people realise that their time on this earth is limited, and on the other, they recognize the importance of having the means to spend comfortably.
This is why wealth creation trumps savings today. Consider the Nifty 50, India’s benchmark stock index. It has appreciated over 89% in the past 5 years.
When considered for 30 years, from 1993 to 2022, most investment classes have outpaced inflation, which averaged 2.5%. For instance, mid-cap stocks yielded returns of 11.07%, large-caps 9.6% and small-caps 8.5%. On the other hand, cash in a savings account only returned 2.3%.
The foremost thing to do with your income is to create an emergency fund. Once sufficient liquidity is built for rainy days, you can look beyond the peace of mind of having “enough." In India, return rates on savings accounts or bank deposits range from 2% to 7% in the short term. However, returns from the financial markets have averaged around 12% in the 5 years from 2018 to 2023.
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