Don’t stack up money, invest for best returns

Haven’t you heard the advice ‘don’t let money stay idle’? Have you wondered what it means? Of course, we all know a safe is safe after all. And if it’s a bank safe, all the more so. You even earn a little return on it. But besides this, is there something to it? Well, if you talk to a financial expert, he will use the phrase ‘time value of money’. Simply put, it means your money has some value that is linked to time. “Money and time are related. For example, receiving Rs 10 today is not the same as receiving the same amount after two years. Same is the case of repaying a loan today or after six months,’’ explains Gaurav Mashruwala, a certified financial planner.

His point is, if you get Rs 10 today and you have invested it somewhere and earned 10% return on it in six months, the money would have grown to Rs 11. Ditto for repaying a loan after six months. If you earn something on the money till you repay the loan, you are left with some spare cash. On the other hand, if you pay it immediately, you wouldn’t get a chance to make those extra bucks. Sure, when you are repaying a loan, other factors like penalty enter the scene. However, we won’t concern ourselves with such details here.

“When I meet some people for the first time, I am amazed how much money have they stashed in their savings account. When I ask them why they didn’t make any investment or open a fixed deposit, most say they haven’t decided on it,’’ a wealth manager says. “When I tell them they could have earned at least 6-7% on it in the last one year instead of a measly interest on their savings account, they realise their mistake. But then time wasted is a lost opportunity to make more money,’’ he adds. Some experts also use the concept to drive home the point that if you don’t invest the money properly (on proper investment avenues, that is), it may lose value partly.

“With time value of your money enhances or reduces,’’ says Mashruwala. “For example, if someone is offering you Rs 10 today or Rs 11 after six months, what would you choose. Obviously, Rs 11 after six months is better because it is 10% extra in six months,’’ he explains. The wealth manager points to another scenario. “Many people keep their money in safe avenues like bank deposit even for long-term needs. The question they should ask is what is the point of earning below inflation. It means you are at the risk of an erosion in the value of your capital,’’ he says. For example, if the inflation is at 6% and you are earning 3.5% from your deposit, you are definitely losing the value of your money.

The most important aspect of time value of money is explained by the power of compounding (Einstein called it the 8th wonder of the world) that enhances the value of money by many times. Unlike in a simple interest scenario, where the interest is given to you periodically, here the interest or return is reinvested and you would start earning on it too. Because of this multiplier effect, the corpus grows immensely over a long period of time. This is one of the reasons why experts advocate equity for long term goals.

Money and time are related
For example, Rs 10 earned today is not the same as earning it after six months
With time, value of money can appreciate or depreciate
If you don’t earn more than inflation, value actually falls
When you invest over a period of time, power of compounding multiplies your money.