Money Heist: Savers are Losers
Disclaimer: There are a lot of repetitive numbers in this blog which might turn some people down but trust me they are simpler than reading Diary of a wimpy kid and miles more important, so please don’t skip them or quit, I am not making any money doing this but you are. This is an irritatingly long blog but it’s worth it. (God, I love putting disclaimers)
Backdrop: A few days back, my father wanted me to go through his SBI savings account statement of 2019. While having a look at them, I noticed that throughout the year, an amount of ₹11 lakhs was constant in the account i.e., at any point throughout the year, the account had 11 lakhs or more money in it. I knew this wasn’t good. After some calculations, I told my father that he had lost somewhat ₹55k in 2019 in his savings account which, contrastingly, he was expecting to increase at standard interest rate and then I tried to explain him how, to which he responded, “Haan haan, chal apna kaam kr ab” (Not that I was expecting anything else since he had only one enormously successful investment ever in his life, me).
Let’s get some terms clear before we reach to any conclusions. To embed a story, my father was losing his money at a rate of 7.6% while gaining at a rate of 2.7% in his bank, keep these numbers and connect the dots along.
Inflation: If you already understand this term, I have huge respect for you but actually you don’t. Heads up, yearly Inflation is, in simplest terms, your yearly increase in cost of living.
Okay, have you heard your grandparents say, “We used to go shopping with ₹10 in our pocket and yet come back with some left. What are you boys doing?” or “Hum to 5 rupe mai mela ghoom aaate the”. This is what inflation is, What they could buy for ₹10 forty years back, we have to pay ₹100 for the same stuff. The same Parle-G which cost ₹2 ten years back costs ₹5 now due to inflation, this hurt. So, technically and effectively, today’s ₹5 is equivalent to ₹2 of 10 years back. Thus, the value of your cash reserve is decreasing. There are a hell lot of technicalities involved but this should get the intuition of Inflation clear to you.
In 2019, inflation was 7.6%, remember the story, start connecting the dots.
Compound Interest: This is again is a mighty powerful term when understood clearly (BTW our schools taught this in 8th grade but nobody learned, I definitely didn’t). By definition, Compound interest is the interest on a loan or deposit calculated based on both the initial principal amount and the accumulated interest from previous periods, (lol). This is pretty self-explanatory but again, addressing your financial and mathematical illiteracy, let’s understand this with an example.
Let’s say you give me ₹1000, no, I give you ₹1000 for 2 years with an annual compound interest of 10%. This 1000 is called the principal amount. After the first year, you owe me 1000 + 10% on that 1000 i.e., 1000 + 100 which is equal to 1100. Now what’s coming next is interesting, after the second year, you owe me previous year’s 1100 + 10% on that 1100 which is equal to 1100+110 = 1210.
SBI interest rate on savings account in 2019 was 2.7%, connecting?
Below picture might give you a broader view:
You might not understand the significance of this but if by any chance, you have a way with numbers, you will understand that this is ridiculous growth.(Bhai Ashish mere 500 wapas krde jo maine tujhe 3 saal pehle diye the, tu bina interest k hi wapas krde, you have been the shitiest investment I ever made).
What’s important here is to note the rate of interest I assumed, 10%. This is a rate you can easily achieve on your investment with very low risk. But our banks offer mere 3–4% on savings accounts, SBI offers 2.7%. You see Banking sector is such a scam, they give you money (loan) at an interest of 12% or more while they keep your money(savings) for a return of shit 3–4%.
Coming back to the story we started with, in year 2019, inflation was 7.6% and SBI interest rate on savings account money was 2.7%. Simply put, my father’s money in his savings account was decreasing at a rate of 7.6% and increasing at a rate of 2.7%. Difference being 7.6–2.7= 4.9 and approximating it to be 5%, his money lost it’s value by 5% which of 11lakhs is 55k INR.
The big question is, if it’s so easy to understand, why is nobody talking about it?
Well because the money is losing its market value and not face value. 11lakhs are still 11lakhs, or rather more because of 2.7 % interest, we don’t realise that although it’s face value has increased but it’s market value has dropped, in the market we can’t buy the same stuff which we could buy 1 year earlier with the same amount and since it’s growing at a rate of 2.7% on paper, it’s obvious and natural that boomers aren’t gonna get it.
Okay, so if not savings account then where? Answer is I don’t know, or rather I won’t tell you. But following is why you should.
Power of compounding: This is very self-intuitive so we’ll directly head to the example, You’ll like this:
Let’s say you are 25, and you decide to make a smart investment with an average return of 10% annually, and you started investing ₹10,000 every month for 20 years until you are 45, that’s when your kids and stuff kick in, lol, and now you decide to stop investing that monthly amount but you are ok with not touching your already invested amount which you have been investing for past 20 years, until you turn 60, and now you need the money.
So, your invested amount is:
(monthly invested amount) * (number of years) * (12)
Which is,
10,000*20*12 = 24 lakhs
At the age 60, when you want your money back, with 10% compounding growth, it would have turned to, guess what?
5.61 Crore INR !!!
Again, this is the face value of it, obviously 40 years later inflation is gonna take its toll but believe me, by all means, this amount is going to be huge even after inflation. This is why you need to understand your finances.
Let’s look at the cycle in case you were lost between the words.
*BTW when I say ‘no liabilities’ at the age of 25, you don’t need to ask what I’m expecting from my non-existent love life.
Investing is like a tree, you need to water it as long as its roots aren’t deep enough, once they are, you just have to enjoy shade without any input, the tree feeds itself. As the case here, between the ages 45 to 60, your monthly investment is 0 yet your money is growing.
And if you manage to choose the right investments, it could also be paying you dividends which will be taking care of your expenses along with your money growing untouched. This, in terms of Robert Kiyosaki, is making your money work for you. It’s the actual difference between rich and poor, money without financial intelligence is soon gone. Being wealthy and having a lot of money are two different things.
I’d like to finish by quoting someone very wise:
“Lottery to bahot logo ki lagti hai, sab ameer nahi bante”
-Aman Singh
I can write 10 more blogs just from the jargons of this blog but I won’t because it’s something for you to explore and understand. Trust me, our schools failed miserably at teaching us some of the necessary lessons.
