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The Importance of Saving and Investment

Most of the people are using the terms saving and investment interchangeably. However, they are not the same. For that matter, they are two wheels of the same cycle – generation of wealth. The financial products which help us to save and invest are different too. In this article, we will look at the importance of saving and investing the money.

Savings

The act of controlling your expenses to accumulate money is called Savings. People around the world realize that they need some funds to take care of their expenses, in the situations where their income is unable to support the costs. It can be a medical emergency or sudden loss of a job or unplanned change of residence.

How to save money?

It all starts with creating a budget. Sit down with a sheet of paper and create two columns – income and expenses. List down all sources of income and avenues of expenses. Next, categorize your expenses as high, medium and low priority expenses. Learning how to save a lot of money requires a good understanding of your expenses and the priority they hold in your life. Now focus on the low and medium priority expenses and try to think of ways where you can avoid them. Once our income starts exceeding your expenses, you will save money.

Also Read: Investing and Saving – Know the Basics

Importance of Savings

Now that you are clear about how to save your money, it is necessary to understand the importance of saving money. Most of the elders urge youngsters to limit their costs and save money. But the question that most of them face is: ‘Why to save money?’ Here are some reasons that highlight the importance of savings:

    • Makes you financially independent

 

    • Don’t need credit cards or loans and don’t pay interest to financial institutions

 

  • You have a reserved fund to manage emergencies

In a nutshell, savings help you lead a stress-free life.

Invest as Low as 5000 AED

Investments

The act of buying something so that it either appreciates in value over time or provides regular income is called Investment. So, if you invest your money in gold, then you expect it to increase in value after holding it for some years. Similarly, by investing money in shares or mutual funds, you expect more money than your original investment.

How to invest money?

There are many avenues to invest your money like equity shares, mutual funds, gold, bank deposits, bonds, real estate, insurance, etc. However, before you start investing, follow these three steps:

    1. Define your investment objectives or financial goals.

 

    1. Understand how much risk you are willing to take with your invested capital. Remember, higher the risk, higher the expected returns and vice-versa.

 

  1. Determine the time period for which you would want to invest and/or stay invested.

Investment requires a lot of patience and discipline. It is best if you can start investing your money at an early stage of life as the compounding effect can appreciate your capital exponentially for longer tenures. Also, keep in mind the tax implications.

If you save money and don’t invest it, then rising costs will soon devalue your savings. How much was a bag of chips worth 10 years back and what is its price now? The corpus of funds that seems huge now will not be so huge ten years later. Hence, investing is important. Here are some reasons that highlight the importance of investment:

    • Helps you create wealth

 

    • A retirement focused investment plan can ensure that you stay financially independent even after you stop earning

 

    • You can reach all your financial goals by investing wisely

 

    • At a later stage in life, you can start your own business by using the wealth generated by investments

 

  • You can invest in products that offer tax benefits and can save on a good amount of tax

Also Read: How VAT implementation affects your daily life

To summarize, once you know how to invest your money, you can achieve almost everything that you desire,  plan for it well in advance and invest accordingly.

Should you save or invest?

Ideally, you should invest only after you save money. Since investments are made with the expectation of earning returns, your savings will ensure that you are covered in times of unplanned exigencies.

Start saving small amounts of money every month and keep them in a bank account. Once you feel that you have accumulated a reasonable amount of money, start looking at avenues for investment by following the three steps mentioned above. Remember, don’t wait for too long before you start investing. You will lose the benefit of compounding and the value of money will keep going down with time.

When to shift from savings to investment?

Remember the exercise we did when we spoke about how to save money? The sheet of paper where you list your income and expenses will help you determine when to switch from savings to investment.

The expenses that cannot be avoided and a reserved fund for emergencies needs to be kept aside before you start investing. Do you have a home loan? Do you live in rented accommodation? Ensure that you take all your important expenses into consideration and then determine the corpus that you need as savings to keep you comfortable. Once that corpus is reached, start investing according to your financial goals.

Also Read: Different kinds of financial planning

Conclusion

Remember, saving and investment are two powerful tools in your hands that can help you to build a financially secure and independent future. Use these tools wisely. When you are saving, don’t cut costs drastically just to increase your savings. Only avoid costs that are not really important like reducing the number of movies you watch at the cinemas or decreasing the frequency of dining out. Enjoy the journey of saving and investing.

Check Investment Opportunities in Real Estate

Smart Investment Options for Beginners

Have you ever thought of investing your money into something productive? Do you want to invest your cash into something where you get good returns? You can invest in many ways, but some options are better than others. Read on below to gain a better understanding of what’s out there.

1. Investing in Mutual Funds or (SIP)

A Mutual Fund is a pool of savings for multiple investors. This common pool is created to invest in any one of the assets (of your choice) or many asset classes such as: equity, liquid assets etc. It is called Mutual Fund because all the rewards, risks, gains or losses arising from the investment made out of this savings pool is being shared by the investors in the proportion of their contributions.

mutual funds investment optionThere are two ways to invest in Mutual Funds:

Direct

People can do it by visiting the nearest Mutual Fund company or they can apply online. Forms can be availed and submitted to the Mutual Fund’s company office or can be downloaded from their company website.

Agents

Agents are professionals trained to help the customers who have doubts regarding the information on various funds provided by the company. They help in processing the applications and dealing with the issues regarding the redemption, cancellation, transfer of the dealings, amongst other things. Agents usually charge a small commission which is added to the purchase price of the funds.

Three types of Mutual Funds:

Based on Assets

  • Equity Funds
  • Debt Funds
  • Money Market Funds
  • Balanced or Hybrid Funds
  • Index Funds
  • Sector Funds
  • Tax-saving Funds

Based on Structure

  • Open-Ended Funds
  • Close-Ended Funds

Based on Investment Objective

  • Growth Funds
  • Income Funds
  • Liquid Funds

2. Investing in Gold

gold investment option

Gold is a good way to ensure wealth preservation to give to future generations. There are two ways to invest in gold- physical form and on paper.

Physical gold like coins, bars, jewellery are assets that can be physically held.

Paper gold involves future contracts and ETFs and is usually traded without the physical gold. These are often meant for short-term profits and liquidation, have lower premiums and are far riskier for the beginners to invest.

Gold premium signifies two things- Spot Price and Premium Price.

Spot Price is the current market price at which an asset is bought and sold for immediate payment and delivery. The Spot Price is calculated according to the recent average bid price offered by worldwide professional traders.

Premium Price is the added cost on top of the Spot Price to cover things like minting, transporting, storage and other additional costs. The premium charges differ from dealer to dealer.

3. Fixed Deposits

fixed deposit investment option

Fixed Deposits are investment instruments offered by the bank and non-banking financial companies, where one can deposit their money for a higher rate of interest than a savings account. You can deposit a lump sum of money in a fixed deposit for a specific period ranging from 7 to 10 years. Once the money is invested it starts earning interest based on the duration of the deposit. Money from Fixed Deposits cannot be withdrawn before the maturity period but one can withdraw the money after paying a penalty. Also, tax is deducted at source, from interest on Fixed Deposits.

Benefits of Fixed Deposits

  • Investors can earn higher interest on their surplus fund from the fixed deposit and can be easily renewed.
  • There is no risk on the returns of Fixed Deposits as they are assured.
  • No effect of market fluctuations on Fixed Deposits, i.e., the greater safety of your capital.
  • You get benefitted from the interest rates offered by the company FD.

4. Real Estate

reit investment option

Investing in Real Estate is an ongoing trend as it gives good returns over a long period of time.

Benefits of Investing in Real Estate

Steady Income

Most of the yield from Real Estate investment properties comes from rental income. Regardless if the property market is down, you will still continue to earn a steady rental income. You can invest in multiple properties all in one go to increase the positive cash flow.

Long-Term Financial Security

Investing in Real Estate provides investors with long-term financial security and brings financial reward if you have a steady flow of rental income. Unlike stocks, which can rise and fall sharply in value, land prices do not fluctuate at the same rate. If anything, your house price will increase over time because land is a growing asset.

Inflation

With inflation, the value of your property increases and with increased interest rates, your rental rate will increase as well.

Wealth Creation

As with any asset class, Real Estate has its ups and downs. If you stick with it, over time the value of the land will appreciate and yield positive results. Half of the world’s wealth is tied up in Real Estate because of its low volatility and eventual good returns.

5. Bonds

finance bonds investment option

When you buy a bond, you will lend money to the government or a company and in return, they will pay a certain interest rate. Bonds are different from a deposit that you can sell them because it is not mandatory to hold them until maturity.

Returns on Bonds

Comparative to bank deposits, bonds pay a higher interest rate, therefore they are a good option if a steady income from savings is the goal. If you hold the bond till maturity and the company doesn’t fail, you will get back what you’ve put in, and the interest rate promised. If you sell the bond earlier, you have money equal to the coupon rate.

Though bonds are safer than shares, they too have some risks such as  

Interest rate risk -where the market rates rise and we are earning less compared to other investments

Inflation risk -where a high rate of inflation lowers the value of the interest we earn

Liquidity risk – when you can’t find a buyer when you want to sell.

A government bond can be safer than the bond that was issued by the company. The downside is that safer bonds tend to have lower interest rates. Some bonds have a credit rating as to guide how risky they are.

Our Purpose

We all have a purpose for what we do, whether it’s going to work, playing sports or spending time with family and friends, there is a purpose behind our actions. Corporations need to have a purpose as well. Companies need to understand why they exist and do what they do. It must be more than just about making money and creating shareholder value. Without defining the purpose, you will never be able to measure your success. Without purpose, making money will never be gratified as you will want to continue making more at any cost.

strongly believe in purpose. Purpose gives you direction, it helps you develop empathy, it allows you to serve your customer better and engage all stakeholders to build a better ecosystem, or rather a world. I founded Smart Crowd to fill a personal need. The idea for Smart Crowd was conceived around the time when Brexit occurred. I was of the view that Brexit would take place and it will be an optimal time to purchase real estate in the UK due to the depreciating pound and the negative short-term impact it will have on real estate prices. It was a long-term investment view. I also thought it would be a good diversification play on US dollars as I essentially earned in USD and was overexposed to the currency. However, I struggled to find something I could afford. For personal reasons, I didn’t want to obtain financing to make my investment. I then tried to convince some family and friends to pool money together to purchase one property, but those efforts were also unsuccessful. That’s when I thought: Wouldn’t it be great if there was a platform were likeminded people like myself can come pool capital to purchase investment opportunities? Over the next few months, I did a lot of research around this idea which eventually evolved into Smart Crowd.

Parallel to this, I’m an avid follower of the capital markets. I obtained my CFA charter holder not for career reasons, rather out of personal interest. If you review my LinkedIn profile, you will notice my commentary on general investment philosophies and get a sense that I am always looking out for the little guy who is usually exploited in the process.

This personal interest in the capital markets and desire to educate the masses to steer them away from bad investment decisions fit with the idea of Smart Crowd and helped drive the purpose behind of Smart Crowd. Smart Crowd’s purpose is to provide people with an alternative to save and invest in real estate in a manner where they don’t have to take on too much risk and leverage. Real estate is not only a place we call home rather it’s a financial asset that historically has been restricted to the wealthy due to large investment requirements. The average person must save for many years or take leverage to climb the property ladder. The average person has to work harder for his/her capital, whereas the wealthy find it easier for their capital to work for them. I’m sure you all are aware of income inequality and the wealth gap is only getting wider.

Throughout the world, the middle class is being wiped out and very little is being done to solve the structural problems causing this phenomenon. A recent report by Boston Consulting Group found that 1% of the world population owns 45% of the world’s wealth. The report also stated that the wealth of the top 1% is growing almost twice as fast as the affluent segment. The BCG report predicts the wealthiest households, owning more than $100 million in investable assets, will see their wealth grow by around 9 percent over the next five years. Households with less than $1 million have expected growth rates closer to 4 percent. How is that fair? The ones in most need find it harder to accumulate and preserve wealth than those who don’t necessarily need it.

This is a big challenge and a challenge that can’t be solved by one organization. We collectively need to change our mindset and make structural changes to tackle this concentrated, accumulation of wealth. Just to be clear, I’m not advocating socialist policies to bring about this change. I’m a capitalist and embarking on my venture to make money but we all have a responsibility to help those less fortunate than us. It’s not only about giving equal rights to everyone it’s about being fair to everyone and not exploiting them as brilliantly depicted in the picture below:

We believe Smart Crowd is going to contribute to solving this challenge by giving the average person an opportunity to, “Unlock their wealth potential” by building a diversified real estate portfolio without taking on too much leverage and risk. As this asset class has been typically used by the wealthy to reserve and accumulate capital has been inaccessible by many for far too long. We want to give everyone an opportunity to be able to participate but also be able to spread their risk across different assets. We want to make an intelligent investor out of everyone by making them part of the “Smart” Crowd.

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