Saturday, November 3, 2012

What Stops you from investing?

I was reading the news that a college out from Kerala is offered a job in Google with annual salary Rs Seventy Lakhs (Rs 7,000,000). The immediate thought that came to my mind is what he is going to do with this much money.  His salary is a public figure now, I am wondering how he will deal with numerous requests for alms. He cannot say he has no money, no one will believe. Also, I am feeling happy our Government will get a big amount as Income Tax from him.

Some people may be thinking same thing about the IT Professionals (Not lucky enough to draw 7 million salary, but still their annual salary goes to a few lakhs). What these young guys are doing with this much money? But what the questioners don't know is when people get more money, the expenses also go up. They travel in big cars, stay in big houses, they get best treatments, but at the end of the month salary account of most of the people are in same way, no or less money. 

I read somewhere that average Americans save 3-5% of their monthly salary, whereas Indians Save 25-30% of their income. As per the statistics, Indians doing better here. I have still one or two friends, who are very reluctant to investments. I asked then during casual chats, what stops them from investing, despite their high profile salaries. I got many reasons, I am listing top 5 reasons I got.

Top n list was best way to get reader attention. Like top 10 mutual funds to invest, Top 10 stocks to buy, Top 10 investment habits etc. But nowadays it is overused by bloggers and authors, I usually skip such articles. I am not posting this top-5-reasons-not-to-invest to get more reader attention, but I want to counter some of the arguments against not investing. Some of the below were my excuses for not investing for a long time. As I told you, these are from my personal experience, not from any scientific surveys.

Here you go.

1. It is too complicated.

Some people think investment tools are too complicated. They have a point there. Some of the investment tools are overly complicated and opaque. But, the good news is there are simple and transparent investment tools as well. A bank recurring deposit, for example, is very simple. You pay fixed amount monthly and you will get a lump sum amount at the end of fixed term. If you are not mathematics savvy, you may think that the underlying compound interest calculation is complex. But who cares? You know what you are going to get at the end.

2. No leftovers for investment

"The expenses are so high that at the end of the month nothing left for investment. I will start investment when I get next salary hike." This is a serious problem. But who told you  to invest at the end of the month? Why don't you do it at the begining of the month? Immediately after you recieve your salary? If you do so, you will have to tighten your belts at the end of the month. Yes, do it, and it will make you stronger financially. Needless to say, don't use your credit cards at the end of the month, that will make things worser.

If you were rich enough to have some balance in your salary account at the end of the month, you can manage without the finanace management. Because, each month some amount is accumulated in your salary account. This amount will help you in case of a financial crisis. But what if no amount left at the end of the month? That definitely means you need to give immediate attention to your finances. You need to think about investment more than any one else.

3. Inflation may eat up my investment

Again, this is a valid point. If you have Rs 100 now with you, you can purchase goods or services of worth Rs 100. But if you save it for one year and use same amount to buy goods next year, you will not able to purchase goods worth today's Rs 100. Because, the prices of everything is going up year by year. This is the effect of inflation. So, don't you think it is better to spend now every penny you have?

When you invest it should be in a way that it should grow to beat inflation. For example, if your Rs 100 grows to 110 by one year (10% return), and inflation rate is 10%, you can still buy goods, which worth Rs 100 today, next year. If your investment gives 12% return, you can beat inflation. So, if inflation is your concern, you should invest in schemes, which offer high returns.

There is another side of this story. The debt based investment schemes, like bank recurring deposit and Public Provident Funds, usually give return below the inflation rate. For example, these schemes give 7-8% return, and for the last a few years inflation is near 10%. So, you will need to take risk, and invest in equity based investment tools, like Stocks or Mutual Funds. These usually give returns above inflation rate in long term.

4. I am not sure what happens in long term

This is one of the nasty excuses. "15 years ago, we were not heard of mobile phones or LCD TVs, except in science fictions. So, who can predict what happens in next 15 years? There may be drastic changes in future. What if those changes affect my investment? For example, what if the Government decides to catch all investments of citizens? or Who knows in what condition I am in after 15 years? So, I think it is better not to invest."

I have no comments on this. If some one believes in this, don't invest. That's all.

5. I am ignorant

I believe this is most common reason for not investing. People are not aware of the power of investment. I will tell you one scenario, which is narrated in an advertisement of a retirement plan.

If a person invests Rs 500 each month from his 18th age, and the investment gives a return of 12%, by the age of 65, he will get a lump sum of 1 Crore (10 million). This is the power of accumulation and power of compounding.

Well, if you are above 18 years of age, don't worry. Still if you start investment now, you will get a good amount in long term.


If you are not investing due to any of the reasons above and you are convinced by my explanations, start investing now. Or if you are still not convinced, don't invest. It is your money, I have no right to tell you what to do with it.

For others, happy investment.

Mean time, if you have any other reason for not investing, please feel free to put it in the comments.

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