It often disappoints me when I heard of people who do not know how to invest their hard earn money. I often ask those who are willing to share with me about their savings. From housewives to professionals such as accountants or finance executives, their answers usually without fail, frustrate me. They put all their savings in the banks, namely, fixed deposit (FD) accounts. All their savings.
I have zero, zilch, nil, amount in fixed deposit!
To achieve financial independence and to increase our wealth, we must know how to invest our hard earn savings. Putting all our surplus funds in FD won’t help us to achieve our goals.
Our aim is to be able to increase our wealth thus our purchasing power.
Let me put into a simple illustration, a fable (short story using animals to convey message) of how damaging an all FD investment can be to your wealth accumulation plans.
There is this Country M, that faces inflationary pressure due to the rise of oil. The black gold. Unfortunately, the economy is not doing so great. Thus, the government is unable to raise interest rate. Low interest rate is important to encourage economic activities to spur borrowing and spending to generate income for all.
Catty has 100 meows. The currency of country M. She decided to invest in the FD that promised her a guarantee interest of 3% p.a. As the interest is guaranteed and the investment is safe, being conservative, she feels comfortable to park her hard earn meows there. Besides, she is ignorant about other investment vehicles and basically to her, has no other choices.
Our wealth can be measured by the ability to buy things (purchasing power). Assume that at the beginning of the year, a packet of cat food cost 1 meow. So Catty could have purchased 100 packets with her 100 meows. At the end of the year, she happily took out her money from FD that gave her 103 meows in total (principal + 3 meows for interest). Unfortunately, the inflation rate for that year was 8%, thus a packet of cat food cost 1.08 meows now. Poor Catty, with the 103 meows she has, she could only buy about 95 packets of cat food now instead of 100 packets. Basic mathematics, 103 meows divided by 1.08 meows. No wonder her kitties are all getting skinnier!
A smart investor will find an investment that can give him/her a return high enough not to only cover inflation but also improves the purchasing power. My advice to Catty would be that she learns up more on investments and take the big bold step to move away from FD and starts to invest in other investment vehicles. Be it the simple sukuk investment or the slightly complicated shares. The first step is always the hardest, but, as the advice goes, the journey of a thousand miles begins with a single step.
Contributed by C.ky
Disclaimer: FD can still be useful investment vehicle to park your emergency/precautionary funds. Don’t blindly invest in other investments for the sake of investing though. Learn first!
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