Chapter 7: What are Long-Term Savings?
Savings gets you the funds you need to achieve your goals. It doesn’t take too much effort to make savings grow. With a simple savings account, you can afford to buy almost anything you want. Savings goals work best when you think short term, medium term or long term.
Short term goals might be buying a mobile phone, medium term might be buying a car and long term could be buying a house, something which sounds far away. If you put aside some money, every time you get paid it will help you reach your goal faster. However, you need to plan your finances according to your goals.
What are Long-Term Savings?
Long term savings mean savings for a minimum period of 3, 5, 10 or 20 years. It could be for anything- running a successful business, retiring at the age of 40 or wanting to go on a world tour.
Key features of Long-Term Savings
1. Time Period - Long term savings fund gives you enough space to understand the market trends and the features for different saving instruments in the long run. It is highly effective and very likely to result in meaningful wealth creation because it places your focus on things that really matter when it comes to saving. So, instead of thinking about day to day fluctuations of stock prices, you would focus on the company’s growth prospects or management competency. All these factors drive long-term returns.
2. Power of Compounding - Albert Einstein has described compound interest as the 8th wonder of the world. Compounding is a process in which the gains from an investment are reinvested to generate additional earnings over time. In the long run, the power of compounding works wonders. Compound interest helps our savings grow over the long term. Start saving early and see money multiply manifolds specifically in case of long term savings with high interest rate.
3. Diversified Portfolio - Diversification allows your portfolio to grow well. In the long run, you can put your money in diverse financial products thereby reducing your risk and generating greater returns in the long run.
4. Risk - Risk is substantially covered in case of long term saving options. The probability of risk is high in case of short term savings due to rigorous fluctuations in a small span of time.
5. Beats Inflation - Savings with a longer time horizon, help you beat inflation as time joins hands with compounding, thereby enabling you to maximize your wealth.
Long-Term Saving Options You Can Consider
1. Public Provident Fund (PPF)- It is a tool offered by the government with a minimum investment of Rs. 500 and maximum of Rs. 1,50,000 p.a. Investing in PPF also offers tax benefits.
Returns: 7% to 8%
Lock-in Period: 15 years
2. National Pension scheme (NPS)- It is a government initiated scheme wherein people can start saving early to reap returns pre or post retirement. It is also a tax saving instrument.
Returns: 8% to 10%
Lock-in Period: Till retirement
3. National Savings Certificate (NSC)- It is a government sponsored scheme for small and medium income investors with a minimum investment of Rs. 100 and no maximum limit.
Returns: 7% to 8%
Lock-in Period: 5 years
4. Equity Mutual Funds – Equity mutual funds offer good returns in the long term by spreading your investment across different companies and sectors. Some equity mutual funds also offer tax benefits.
Returns: 12% to 15%
Lock-in Period: 3 years in case of tax saving Equity Linked Saving Scheme (ELSS) mutual funds
5. Unit Linked Insurance Plans (ULIP)- These invest in equity and debt markets and give decent returns in the long term along with providing insurance cover. They also provide tax benefits and help you in achieving various financial goals.
Returns: 7% - 8%
Lock-in Period: 5 years
6. Long term bank fixed deposits- Instead of parking your funds in a savings account for a long period of time, you can put your money into fixed deposits which offer a higher interest rate.
Returns: 6.25% to 6.75%
Lock-in Period: 5 to 10 years
As goes the popular saying,” Little drops make the mighty ocean”. Even if you can’t save much, your regular deposits plus the interest they give will give you a decent profit in the long run. Savings lead to financial comfort and security. So, in many important ways savings go hand in hand in having a happy future.
(Disclaimer: Please note that the returns mentioned can vary as per the economic conditions and bank rates)