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Physical savings to financial savings!

On the face of it you may be a bit perplexed as to what our today's topic relates to. I agree, visually it may be difficult to comprehend the integral subject matter which I am going to touch upon today.

It is nothing but a transition about savings habits from ancient world to the modern world. Not to worry, I am not going to write something on the ancient history but about certain saving habits practised during the olden days and how they got carried forward to the modern time.

Hope you remember the old stories narrated by our grandparents as to how they used to execute their commercial transactions when prevalence of modern banking was a distant dream. We have heard about the 'barter system,' wherein goods were exchanged based on their demand and supply. For example, if one had surplus grains in stock but no 'sugar' then in exchange for a certain quantity of grains, the required quantity of sugar could be bought easily.

Therefore, 'barter' is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is mainly bilateral, but can be multilateral and usually exists parallel to the monetary systems. Barter usually replaces money as the method of exchange.

Thus, due to existence of barter system our forefathers were practising "physical mode of savings" and this is how they used to save not in the form of coins or currency notes but in the form of physical assets e.g. grains, cattle, precious metals like gold, silver or any other valuable metal, real estate like house, piece of land, etc.

For ease of reference, since I have explained about 'physical savings' let me also provide you a simple meaning of 'financial savings.' An easy example of financial savings is when you put your money in the bank and it gains interest over a period of time. To take this definition further, financial savings is practised when we invest our money into a financial instrument like - bank deposit, treasury instrument, mutual fund, corporate bond, shares, etc.

What basic difference did we observe between these two modes of savings i.e. physical mode and financial mode? Firstly in physical mode, we hold a particular asset (physically) as a part of our saving, while under financial mode what we typically preserve or hold is just a piece of paper like - Pass book, FDR receipt, share or bond certificate or any other paper instrument. Secondly, financial savings can be easily converted into liquid cash while it is a bit hard to covert the physical savings into hard cash.

Considering the above, let me ask a simple question - have we really moved from the physical savings to financial savings? Not really! You would agree that in many least developed countries majority population still practise physical mode of savings. And we know there are many associated risks when savings are maintained in physical form. Some of these risks can be described as - perishable, reduction in value due to natural wear & tear, theft, illiquid, unregulated rate of return, issues relating to storage, etc.

By mentioning these inherent risks my intention is not to undermine the physical mode of savings but the important point is that there is a need for moderation. If somebody saves 70 to 80 per cent of one's savings into physical mode there is certainly a cause to worry due to inherent risks associated with it. Hence, everything has to be practised in moderation by maintaining an optimum balance between physical savings and financial savings.

Off late investment into real estate is termed as one of the most promising investment avenues but this does not mean that you put all your savings into real estate. Similarly investment into gold is equally promising and a lot of investors are driven towards accumulating more and more gold. But in the modern financial world investment into real estate or gold can be achieved by practising financial mode of savings.

For instance, if you want to invest into gold, rather than buying and holding the physical gold in your cupboard one can invest into a 'Gold Fund' or 'Gold Scheme' launched by a mutual fund or bank. Similarly investment into real estate can also be done through "Real Estate Investment Trust (REITs) Schemes."

This is where we have to make a transition from physical mode of savings to the financial ones. Let us participate and encourage this transformation (from physical to financial) which undoubtedly is beneficial to the society at large.