It was undoubtedly a great round of golf today. Though getting up that early on a winter morning to get a good 4-ball slot was really not the best way to start a day, but the satisfaction of having played all the 18 holes today and that too with good scores (without any ‘pinching’ truthfully!) erased all the discomfort of abandoning Rajai early in the morning. Of course, the mystery of Rajesh getting the almost-20 ft putt on the 4th hole was yet to be solved.
Settling down into the cosy chair in restaurant veranda with coffee and snacks rounds on Rajesh due to the miraculous putt and on Pranav for the 12th hole birdie, Rajesh characteristically asked, ‘So boys, what’s up!’. Pranav in his own characteristic way replied, “Nothing great Rajesh, beyond the morning Golf. But just tell me what are you all guys planning to do with the retirement corpus bounty?”
“What else Pranav? Somebody has told me to put Rs 15 Lakhs in Senior Citizen Savings Scheme (SCSS) and 9 Lakhs in Post Office MIS (POMIS) scheme, Rs 4½ Lakhs each in my name and wife’s name. Rest of the money goes to bank FDs – my bank manager has already told me all the details and all this can be very comfortably done from my SBI bank account. So, I’m all set.”, said Rajesh.
“That’s good Rajesh. But do you mean to say that you’ll put all your money in such things only and nothing else?”’ asked Pranav.
AK butted in, “Why what’s wrong with that. Banks are safe and you don’t have to go through any hassles. And to top it, when you put in all your money at one place, you become their Platinum category customer. They will collect cheques from your house, give you many freebies and even give you a sofa to sit with coffee when you visit the bank!”
“Ok, accepted. So, collection of cheque and some freebies with a coffee is worth consigning your money to life-time of devaluation?”, asked Pranav.
“What do you mean? Banks and Post Offices pay a good rate of interest on the deposits and schemes, and with full safety. So, I don’t see where we’re losing. Safety plus good rate of interest is such a good combination. You keep getting the interest in your bank account to spend and if you need any money any time, you can always break one or two FDs and go on your round-the-world trip”, Rajesh retorted.
“Boss, you are probably looking at only what you can see, like the 10% visible part of an iceberg. Do you know that the real value of your money is going down big time due to inflation, you’re losing a lot on taxation and by taking the interest out from your SCSS, POMIS or bank FDs, you are also losing heavily on the magic of compounding?”, said Pranav with a regret in his tone for his financially uninitiated long-time friends.
“Pranav, you always come up with such things which nobody else talks about, and scare us. I don’t understand even a wee bit about what you’ve just said. And the way Rajesh is staring intently at his coffee, I can make out that he’s even more clueless!”
“AK. I don’t want to give a very big financial gyan at this time when we are still basking in the glory of a good round of golf. But let me tell you – by putting all your life-time savings in bank FDs, SCSS and such like things, you are only making sure that the real value of your money keeps going down year-after-year. Do you know what is the inflation rate right now and how much tax will you pay on these kind of investments?”, replied Pranav.
“I don’t know much about tax, inflation and such complicated stuff, Pranav. But I sure know about the value of money. What I have in hand today is the money value that I have. Nothing more, nothing less to it”, smiled Rajesh.
“Bro, it is not so. Just imagine this. Today inflation is about 6.5% per annum, implying that things that you use are becoming costlier at that rate in a compounded manner. And your bank is giving you 5.3% as the rate of interest on the FDs. So, while your own money grows at 5.3% rate only, the things you use in your daily life are becoming costlier at a faster rate! What will happen one, two, five years down the line when your FD matures? The money that you will get then will not be able to buy the things that you can buy today with the same money, before you put it in the FD, simply because your money has grown at a slower rate”, advised Pranav.
He continued, “And this is a simplistic scenario since I have yet not factored in the tax part. You will be in the 30% tax bracket. That means you will pay 30% tax on this FD – netting you just 5.3% less the 30% tax, that is, 3.7% interest. This 2.8% gap between rate of inflation and the net rate of interest that you get on your FDs is the rate at which your money will be eroded in value per year. Similar is the case with your SCSS and POMIS investments.”
“Arrey, this is scary. You mean to say my money value will keep going down when it is in a bank FD. I have never heard of such a logic. What do you say AK? Is Pranav scaring us with his knowledge?”, Rajesh was aghast.
“Nahin Boss. I can see what he means, though not fully. You both know my maths was always weak….”, chipped in AK.
“Col AK Singh and Gp Capt Rajesh Lal, reality remains what I have told you. Inflation and tax combined together are a deadly cocktail and we have to be wary of them. While some amount of money should go into such avenues, putting all the retirement corpus there is sheer hara-kiri.
And of course, don’t forget the grand power of compounding, which we learnt as ‘Compound Interest’ in our school. If we keep taking out money in the form of interest from our FDs, SCSS and PO MIS investments, then we earn simple interest and don’t give our money the chance to be compounded. Do not take such avenues which give you a compulsory interest in your bank unless you need that interest regularly. Let it multiply in a grand manner there in the investment avenue itself so that we can go on Rajesh’s promised cruise next year on his 25th marriage anniversary!”, said Pranav.
“Yaar, you have scared me enough for the day. Of course, I realise that I need to learn more from you, Pranav, to have a Golden Retirement. But the mention of cocktail reminds me to rush home – I have a cocktail planned tonight for some unit officers. Preeti will chew me alive if I’m not home soon. So, see you guys. And Pranav, thanks for this information. We will need to have more of this discussion – after all my life-time savings are at stake”, replied Rajesh, and zoomed off.
- Sometimes assured safety could really be assured loss for you. Full safety will ALWAYS mean a large compromise on returns.
- All investment planning has to take into account Inflation and Tax – otherwise this deadly combination can seriously singe your money’s future value and your life-time plans.
- Make sure your investments ‘compound’. If you take out interest, dividend or just part of corpus from your investments when you do not need it, the multiplication effect that compounding gives you will be lost. Your money will not grow at a rate it is really capable of!