MYTH

One thing that drives every Indian is a fixation on how to be rich. There are different ways to define being rich. For instance, a family with an annual income of Rs.1 crore is rich in a small city, but the same may not match up in Mumbai’s South Bombay or Delhi’s Jor Bagh. But, you get the drift on the importance of being rich among Indians. In fact, the ‘crore’ plays such an important part among Indians’ psyche that everyone’s attention is drawn the moment one discusses how to be a crorepati.

Among young Indians, this wanting to be rich is so steadfastly driven that they start to conjure up numbers of how many month’s income will it be before they make a crore or similar such figure. We tend to save so much from our income to get rich that we get attracted to any financial instrument, which promises a fixed return for easy understanding on reaching the magic figure. In fact, one of the most popular financial instruments, the Kisan Vikas Patra, gained on popularity owing to its simple working: Double your money, which it does now on deposits over 8 years and four months.

It is such traits that make India hold the mantle of being a nation of savers. The savings rate is well above 30 per cent of the GDP. The same logic stems our fixation to keep money in deposits, which earn a defined and fixed return. We get very closely attached to the fact that one can become rich just by saving money each month, which will grow, over time.

REALITY

Your ability to save is defined by your discipline to set aside a percentage of your income less expenses, which means, your income alone is not the factor that will make you rich.

But saving money alone does not help. If you keep Rs.100 under your pillow and let it be there for a year, and if it does not get torn, it will remain intact. But it does not gain in value. On the contrary, it actually loses value.

The reason for the worth of Rs.100 going down after a year is the impact of inflation, which eats away the worth of your money. For instance, you could have bought a box of apples for Rs.100, but the same may cost your Rs.110 or Rs.120 a year later. To keep the worth of your money intact, you basically need it to at least match the inflation rate, if not beat it. This means, that you need to put the money, which is your savings, in financial instruments which will earn you returns that meet, or at least, beat inflation.

You can do so by investing your savings. By investing, we mean putting your money into some form whereby it yields some gains. The financial instruments in which savings will grow in value include stocks, mutual funds, gold and fixed deposits. Each one comes with an element of investment risk, unique to the asset class they belong to, but the upside is that these can make you rich. To be precise, they can actually create wealth for you and make you wealthy. What you need to remember is that the route to wealth creation and being rich is not to save your money, but to rather invest it, of course, in the right instrument.

olmdesk@outlookindia.com