Every cheque that you write is either an expense, savings or investments. Sadly not everybody knows the difference between the three. In fact todays plan includes telling you that there are 2 types of investment too! OOPS, right?
Ok..when you go to a hotel and pay for the food, it is an expense. This is easy to understand NOBODY even asks you ‘how much did you invest in the dinner tonight?’ . This requires no explanation. So the cheque that you write for grocery, milk,vegetables, rent, petrol, gas, medicines…..clearly it is an EXPENSE.
You could also issue a cheque to a bank for making a fixed deposit. Or buying a national savings certificate, or increasing the balance in your Public Provident Fund. These are clearly not expenses. Many people ask you ‘How much did you invest in PPF?’ right? Well tell them that you did not INVEST, you SAVED in savings instrument. You do not expect these amounts to do anything different through out its tenure. It will grow at a FIXED rate year on year for the whole tenure. These are the NO SURPRISES or SHOCKS kinda amounts. These are SAVINGS.
Then there is another kind of cheque that you issue. You buy a fridge, a washing machine, a car, a house…..these are of course expected to give you convenience. You save MONEY – washerman, auto and taxi fare, rent….these are against SPENDING. However some people do call these investments, do they not? How much did you invest in your car? How much did you invest in your house? – these are investments which help you SAVE MONEY. So you can continue to call them investments, BUT these investments DO NOT MAKE money for you. However, they are important, THEY do save money for you.
Then there are some investments that you make – THESE MAKE MONEY FOR YOU. If you buy a house to give on rent, to trade, for appreciation, that is an investment. If you buy equity shares, equity mutual funds, real estate, land, …these will MAKE MONEY FOR YOU. That is investing. These assets will go up, go down, go up dramatically, then slide down. They will give you a decent return, but with a lot of heart aches and scares. High standard deviation, but a high arithmetic mean too. You need KNOWLEDGE to invest. When to buy, what to buy, how much to buy …..not easy, only knowledgeable people make money. So either you have money and a willingness to LEARN or simply outsource it to a fund house or a life insurance company.
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