In this post lets discuss about Earn-Save-Invest cycle in personal finance. Each cog in this cycle is important for our financial freedom and complements each other very well. As we go along in our life, we should be aware of this phases to maximize financial gain.
Earn (Active): People trade their skill, effort or experience to earn money. Thus doctors, engineers and other professionals use their academic knowledge while businessmen use their business acumen to earn money. Most people are very conscious of their earning and leave no stone unturned to maximize that because of varied reasons like peer pressure, maintaining life style, aspiration. So you will find doctors putting extra hours in their clinic, businessmen put extra effort to augment revenue while IT professionals keep hopping jobs.
While active earning can be increased consistently in early life, for most people this doesn’t increase as much in later part of their career. Thus while salaried people get hefty increments in their 20s, it tappers to lower single digits in 40s and 50s.
Save: This means livings well within your means and keeping some of the earned money for future, as they say “save for a rainy days”. While saving a part of earned money is good, letting the same to idle in bank saving account is not. With current inflation of around 9.5%, saving account (current interest return is around 3.5%) gives negative yield. Another means used by many risk averse people is small saving schemes like National Saving Scheme (NSC), fixed deposits (FD), however post-inflation and post-tax return of these schemes are also very low. This erodes the purchasing power of your hard earned money.
Invest: Judicious investment is the only way of building a corpus while tackling the demon of inflation. Money saved should be put to work by investing in various investment channels available. While risk appetite varies from person to person, there are enough investment channels to cater to different risk profiles. Thus direct stock or equity mutual funds give more return with higher risk, debt fund are of less risk and moderate return. Investment goal should also vary with age; capital appreciation at early age and capital protection as one approaches retirement.
Earn (Passive): Passive earning is money earned indirectly without active involvement of the owner. This is result of judicious investment started early in life which keeps generating earning with compounding effect without active participation of the owner. At early years of career when people have steady stream of income, it is difficult to appreciate the importance of passive earning. But as one reach the twilight of life, passive earning becomes important. With increase in life expectation, retirement life span is also increasing. Thus investments made should generate enough passive earning to meet expenses during this phase of life.
While everyone wants to earn more, many know the virtues of saving, awareness about investment and potential of passive earning thereof is still lacking in India.
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