a person budgeting hos money

In today’s fast-paced world, making informed decisions about our finances is essential to ensure a secure and prosperous future. Investing and saving are two primary options that come to mind when considering financial planning. Both play crucial roles in managing money, but understanding the key differences and benefits of each can significantly impact our financial well-being. 

When it comes to the “invest vs. save” debate, it’s not about choosing one over the other, but rather striking the right balance between the two. Both saving and investing complement each other in a comprehensive financial plan. Here’s how you can find the right balance:

a) Emergency Fund First: Before diving into investments, build a sufficient emergency fund equivalent to at least three to six months’ worth of living expenses. This fund acts as a safety net during unexpected events.

b) Identify Financial Goals: Determine your short-term and long-term financial goals. Savings are best suited for short-term goals, such as buying a car or taking a vacation while investing can help you achieve long-term objectives like buying a home or funding your child’s education.

c) Start Early, Benefit More: Time is a valuable asset in investing. The earlier you start, the more time your investments have to grow through compounding, allowing you to harness the power of time to your advantage.

Now let’s understand the above points with an example. 

Ramesh and Mukesh are best friends, both aged 30,  working in the same office, 

Both make approximately 1 lac rupees a month.

Despite their similar incomes, Ramesh and Mukesh had contrasting financial approaches. Ramesh, who had recently tied the knot, believed in the traditional method of managing his finances. Every month, he diligently saved a substantial portion of his earnings, meticulously tucking away Rs. 70,000 into his savings account.

On the other hand, Mukesh, who was married and had a lovely child, embraced a more modern outlook on finance. He recognized the potential of growing his money and securing his family’s future through intelligent investments. Mukesh was eager to explore different investment avenues, and after thorough research, he decided to allocate Rs. 25,000 each month towards a Systematic Investment Plan (SIP) in mutual funds.

Mukesh, convinced that investing was the key to financial success, wholeheartedly advised Ramesh to consider mutual funds. However, Ramesh was quite old-fashioned when it came to money matters. Fearful of the uncertainties that investments might bring, he preferred the familiar safety of banks and fixed deposits.

Let’s calculate the potential outcomes for Ramesh and Mukesh after 20 years based on their savings and investments. For this calculation, we’ll assume an annual interest rate of 10% for mutual funds.

Initial Situation:

  • Ramesh and Mukesh are both 30 years old.
  • Both earn Rs. 1,00,000 per month.
  • Ramesh saves Rs. 70,000 per month (Rs. 8,40,000 per year) and keeps it in the bank.
  • Mukesh saves Rs. 50,000 per month (Rs. 6,00,000 per year) and invests Rs. 25,000 per month (Rs. 3,00,000 per year) in mutual funds with a 10% annual return.

Calculation for Ramesh 

After 20 years, Ramesh’s savings in banks would be:

Rs. 8,40,000 x 20 ≈ Rs. 1,68,00,000

Calculation for Mukesh (Mutual Funds):

Since Mukesh is doing a Systematic Investment Plan (SIP) of Rs. 25,000 every month, his total investment in mutual funds over 20 years would be:

Total Monthly Investment = Rs. 25,000 x 12 months = Rs. 3,00,000 per year

Now, let’s calculate the future value of Mukesh’s monthly investments in mutual funds after 20 years, assuming a 10% annual return:

Future Value of SIP Investments = Rs. 3,00,000 x ((1 + 0.10)^20 – 1) / 0.10 ≈ Rs. 2,47,67,829

So, after 20 years, Mukesh’s investments in mutual funds would have grown to approximately Rs. 2,47,67,829.

Summary:

Ramesh’s Total Savings in the bank: Rs. 1,68,00,000

Mukesh’s Total Investments (Mutual Funds): Rs. 2,47,67,829

Difference: Rs. 79,67,829

The updated calculation highlights the significant difference between Ramesh’s savings in the fixed deposit and Mukesh’s investments in mutual funds. Mukesh’s decision to invest in mutual funds through a systematic approach (SIP) has yielded a considerably higher return, even though both Ramesh was saving a higher amount than Mukesh each year.

This outcome reinforces the importance of investing wisely to grow one’s wealth over time. While saving is essential for financial security, investing in suitable opportunities, such as mutual funds with a historically higher return on investment, can substantially increase one’s financial portfolio.

The story of Ramesh and Mukesh serves as a powerful reminder that making informed and calculated investment decisions can lead to a more prosperous and fulfilling financial future. It encourages us all to strike a balance between saving and investing wisely to secure our financial well-being and achieve our long-term goals.

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