Providing for future has been one good
habit of humans since time immemorial. It would appear that it is the law of
nature. "Ants regularly store more food than they consume".
People were saving in different ways-storing their agricultural produce,
their commodities, gold or currency. They were always preparing for
the rainy days.
In other words, people realized that the source of money is income and
income is limited. They also realized that future needs especially
financial needs would be uncertain and unlimited. Future can hold many
surprises and therefore one should be prepared financially to meet such
contingencies of life. Therefore they saved for the future.
There was a time when people depended upon the landed properties or
ancestral wealth for their livelihood. But times have changed.
joint family system is no more there. Each family unit will have to work and also provide
for the future financial needs of the family unit.
Common financial needs of a
education/Their marriages/Start in Life
Asset acquisition like house/car etc
Unforeseen contingencies like loss of job, illness, accidents, death
Creation of Wealth
It is not enough to save. The saved money
should be wisely invested. Saving alone is not sufficient in money
management because the cost of living is ever on the increase and the value
of money is constantly on the decline by inflation. To counter the
decline in the value of money, the savings should be channelised into
investment so that there is an appreciation of wealth that beats the
inflation. So also to meet the ever-increasing cost of living,
investments will have to be made where wealth is enhanced or created.
Compounding - Time Value of Money
Investment make sense because the money you save
do not remain idle but gives returns in the form of interest, dividends,
capital appreciation, bonus or even lump sum payments in the case of
insurance. Money grows because these returns becomes part of principal
and gives further returns. This is called compounding.
The following chart shows how Rs.100 saved every month regularly grows.
A prudent person should evaluate his state of
finance, determine his future needs and decide on a well-designed mix of
investment alternatives that will attain him, his objectives. This is
personal financial management.