A long time ago when I was a kid...
On one sunny day that I still have fond memories of, my father came home in the evening with a toy pig. I turned it around and discovered that it had a hole in its back. My dad announced that it was my 'Piggy Bank'.
He fished out a 10 paise coin from his pocket and instructed me to put it through the hole in the pig's back. I did it eagerly, expecting the pig to start walking. Walk it didn't but my father patted me on my back and said,
"Son, this is your first saving. I will give you 10 paise everyday and when we have collected Rs50 we will go to the bank and get you a savings account."
Savings! suddenly a new activity had begun in my life that I understood nothing about.
My Dad noticed the puzzled look on my face. He scratched his head and suddenly a meaningful look came in his eyes. I think he remembered the ant menace that my mom had been complaining of for the past few days. He showed me the ants that were carrying grains in a line to their hiding place.
"The ants are carrying grains and saving it for a rainy day, he said.
He took out my World Book Encyclopedia and showed me various other animals that save food for a time when they may need it.
"You know that I go to office to earn money for all of us. But when I turn 58 years, I will have to retire and stop going to office. We will need money to buy food and clothing even after I retire from my job and stop earning. I need to save now, so that I can pay for our food and clothing later," he explained.
"Similarly, you can save the money I give you now to buy a good book or a paint box later," he impressed upon me.
On one sunny day that I still have fond memories of, my father came home in the evening with a toy pig. I turned it around and discovered that it had a hole in its back. My dad announced that it was my 'Piggy Bank'.
He fished out a 10 paise coin from his pocket and instructed me to put it through the hole in the pig's back. I did it eagerly, expecting the pig to start walking. Walk it didn't but my father patted me on my back and said,
"Son, this is your first saving. I will give you 10 paise everyday and when we have collected Rs50 we will go to the bank and get you a savings account."
Savings! suddenly a new activity had begun in my life that I understood nothing about.
My Dad noticed the puzzled look on my face. He scratched his head and suddenly a meaningful look came in his eyes. I think he remembered the ant menace that my mom had been complaining of for the past few days. He showed me the ants that were carrying grains in a line to their hiding place.
"The ants are carrying grains and saving it for a rainy day, he said.
He took out my World Book Encyclopedia and showed me various other animals that save food for a time when they may need it.
"You know that I go to office to earn money for all of us. But when I turn 58 years, I will have to retire and stop going to office. We will need money to buy food and clothing even after I retire from my job and stop earning. I need to save now, so that I can pay for our food and clothing later," he explained.
"Similarly, you can save the money I give you now to buy a good book or a paint box later," he impressed upon me.
That was my first lesson in 'saving'.
A few years later I learnt in my class that all of us have two choices. We can consume now or can consume later. Hence, savings is just postponing consumption.
Does it then mean that only what we consciously keep aside for a rainy days is called "saving"?
"No, what ever you do not manage to consume and stays as a surplus is also 'saving'. But that is a lucky state to be in," my teacher responded.
And that set me thinking...
"If I can 'save' to consume at a later date, I can also spend more now if I know that I can earn enough surplus to pay for it later..."
Just then my teacher's booming voice interrupted my train of thoughts...
Does it then mean that only what we consciously keep aside for a rainy days is called "saving"?
"No, what ever you do not manage to consume and stays as a surplus is also 'saving'. But that is a lucky state to be in," my teacher responded.
And that set me thinking...
"If I can 'save' to consume at a later date, I can also spend more now if I know that I can earn enough surplus to pay for it later..."
Just then my teacher's booming voice interrupted my train of thoughts...
"Borrowing is the opposite of saving," she announced.
Now that was easy to visualize.
I had a classmate who was fairly irregular to class, spent a lot of time in the school canteen and supposedly even bunked classes to watch the 'matinee'.
How did he manage to pay for all his nefarious activities?
Well, he used to borrow money from a few friends of mine who saved their pocket money.
During the break, I manage to accost one of those friends who had lent money to my classmate.
"I can understand why Ramesh (by the way, that was my classmate's name) borrows from you. But why do you lend him money? Can he pay back?"
"Look, I don't really intend to spend all my pocket money. I am saving up for a new cycle. Money always burns a hole in my pocket. Hence, I lend it to him," he answered.
"Ramesh has a rich father, who is a family friend," he explained. "I know that I can get my money back. Ramesh also knows that when he turns 18 he will look after his family business and earn well. And then he will have no time to have the fun he is having now. Hence, he borrows to spend," he added.
Learning for me again
'Saving' is not consuming everything today and leaving something for tomorrow whereas 'Borrowing' is consuming more than what one has today, expecting to save more later to pay up for the excess consumption now.
While 'saving' is being conservative and wise, 'borrowing' is being risky and foolish unless for a basic need. Hence, it makes sense to borrow only when one is sure that in the future he will be able to save enough not only to pay up for his borrowings but also to see him through the days when he cannot earn.
I had a classmate who was fairly irregular to class, spent a lot of time in the school canteen and supposedly even bunked classes to watch the 'matinee'.
How did he manage to pay for all his nefarious activities?
Well, he used to borrow money from a few friends of mine who saved their pocket money.
During the break, I manage to accost one of those friends who had lent money to my classmate.
"I can understand why Ramesh (by the way, that was my classmate's name) borrows from you. But why do you lend him money? Can he pay back?"
"Look, I don't really intend to spend all my pocket money. I am saving up for a new cycle. Money always burns a hole in my pocket. Hence, I lend it to him," he answered.
"Ramesh has a rich father, who is a family friend," he explained. "I know that I can get my money back. Ramesh also knows that when he turns 18 he will look after his family business and earn well. And then he will have no time to have the fun he is having now. Hence, he borrows to spend," he added.
Learning for me again
'Saving' is not consuming everything today and leaving something for tomorrow whereas 'Borrowing' is consuming more than what one has today, expecting to save more later to pay up for the excess consumption now.
While 'saving' is being conservative and wise, 'borrowing' is being risky and foolish unless for a basic need. Hence, it makes sense to borrow only when one is sure that in the future he will be able to save enough not only to pay up for his borrowings but also to see him through the days when he cannot earn.
What is 'investing' then?
This question bothered me till I had my first mug of beer from some bottles that we had smuggled in from my friend's place (it belonged to his father who owned a liquor shop).
Oh boy! I loved it so much, the beer I mean. But soon an idea suggested itself to me. If everybody starts liking it, the demand for beer is definitely going to rise. The growing population will ensure that the demand sustains. Wouldn't then it make a lot of sense to set up a company to manufacture beer? If demand drops then my friends and I can very well step in!
I had grown up finally from the days of aspring to be a bus conductor to wanting to own a beer factory now!
The next day, I started discussing my ambition with my friend's father. During the course of our conversation I learnt of the money needed to buy the fermenting equipment that can produce beer for years to come.
By selling all the beer that can be manufactured, I can recover the initial money spent on the business by the end of three years. Beyond that, the money that I'll make will be surplus. That would be an awful lot of money.
Of course, I remembered that as 'Investment' from my economics textbook.
In other words, 'Investing' means building up to meet future consumption demand with the intention of making surpluses or profits, as they are popularly known.
Oh boy! I loved it so much, the beer I mean. But soon an idea suggested itself to me. If everybody starts liking it, the demand for beer is definitely going to rise. The growing population will ensure that the demand sustains. Wouldn't then it make a lot of sense to set up a company to manufacture beer? If demand drops then my friends and I can very well step in!
I had grown up finally from the days of aspring to be a bus conductor to wanting to own a beer factory now!
The next day, I started discussing my ambition with my friend's father. During the course of our conversation I learnt of the money needed to buy the fermenting equipment that can produce beer for years to come.
By selling all the beer that can be manufactured, I can recover the initial money spent on the business by the end of three years. Beyond that, the money that I'll make will be surplus. That would be an awful lot of money.
Of course, I remembered that as 'Investment' from my economics textbook.
In other words, 'Investing' means building up to meet future consumption demand with the intention of making surpluses or profits, as they are popularly known.
Investments are risky
True, what if tomorrow everybody decides that 'beer' is yuck. Maybe the government will ban beer consumption. Or your plant might develop a big problem for all you know. Hence, there has to be a reasonable profit expectation to motivate an investment.
Also, when you or I 'invest', we forego our present consumption or do it out of our surplus. In other words, 'savings' again supports 'investment'.
Interesting isn't it?
We started with three things that looked as different as chalk, brick and wood, but discovered that the three ('saving', 'borrowing' and 'investing') are related.
But then, I have a few questions in my mind already. I am sure you would have some too.
What if I save Rs1000 over 10 months to buy a cycle and the price of the cycle shoots up by 20% by then? I am losing the 'purchasing power' of my Rs1000. Is there some way I can make up for the risk of losing my purchasing power?
Also, when you or I 'invest', we forego our present consumption or do it out of our surplus. In other words, 'savings' again supports 'investment'.
Interesting isn't it?
We started with three things that looked as different as chalk, brick and wood, but discovered that the three ('saving', 'borrowing' and 'investing') are related.
But then, I have a few questions in my mind already. I am sure you would have some too.
What if I save Rs1000 over 10 months to buy a cycle and the price of the cycle shoots up by 20% by then? I am losing the 'purchasing power' of my Rs1000. Is there some way I can make up for the risk of losing my purchasing power?
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