Money – Save, Invest, Grow!

Savings should be spelled sa’wings’ because money has wings. It flies away!

The biggest difference between ‘rich‘ and ‘not-so-rich‘ people is where and how they use their money. In most cases, rich people use it to make themselves richer.

The basics of finance is simple. To save more, spend less and be happy with whatever you have. Sounds difficult but not with the right mindset. It is important to be aware and interested in finances. You have the power to make your money work for you and generate income.

The cost of something should be counted in the amount of time you spent to earn that amount. Then, it makes you question everything you own and all those years spent toiling away.

Paisa Paisa!

It is important to understand the difference between Assets, Liabilities, Income and Spend.

• What you earn or get is income. Income is your salary or business income, or it can be income from your investments as well.
• What you give is spend. Spend is an interesting part. It includes everything you like and buy impulsively (without actually needing it) but don’t use/wear (I can hear my Mom scolding me). Then there’s rent, movie tickets, restaurant bills, vacations, flight tickets and the list goes on. It is basically something that takes money from you and runs away.
• Asset is something that grows over time and generates income or value,  for instance, if it starts at 10 and grows to 15 gradually. Best examples of assets are a house, land or property (only if it grows in value over time). The calculation should also include the time and resources spent on it over years – maintenance, taxes, insurance, etc.
• Liability is the opposite of asset. It is something that takes money from you and reduces over time. Liabilities are loans and things that look like assets but are not (car, bike, costly gadgets, machinery, etc.). These things reduce in value over the years (depreciate) and take money out of your pocket.

I don’t say you should not have liabilities, but don’t treat them like assets.

An interesting thing to note – health can be an asset and diseases can be a liability… What you need to have a net positive effect is simple (don’t eat those sweets!!)

If you do not have a house or large investment, don’t be disappointed. It is possible to earn the same amount of money growth (or nearly same) through the right kind of investment. These investments are necessary to have a secure old age. I won’t say retirement as that age is different for everyone.

Economics has an interesting term called opportunity cost. It is the cost associated with something that you have spent on vs something that was a better use of that amount of money.

For example, spending on a big fat wedding vs going on a world tour. This is a very personal way of deciding. It can be different for everyone. But i suggest you start looking at all the things you own and things you spend on. See if they are actually necessary and give you happiness or are just a thing that is waste of money. Even if you don’t do anything about it, it is important to acknowledge.

Start saving early and do it consistently. Don’t expect short term results but keep track. Whatever your credit card limit is, your spend on it should always be less than your monthly salary. It is their trick to make you spend more.

Save at least 30% from every salary and keep increasing if possible. Do not buy unnecessary things just because they are priced low or are available on no cost EMIs.

Your savings’ sum should be deducted from your account in 2-3 days from the day your salary is deposited. This way you can avoid spending money that you don’t have.

Always create an emergency fund for obviously, emergencies! This amount should be readily available. In case of health issues (where you don’t want to use health insurance), job loss or loss of any asset.

Investments!!

Types of investments are simply Cash, Savings Account, Fixed Deposit, Recurring Deposit, SIP (Systematic Investment Plan), Mutual Funds, Stocks and Derivatives, Gold and recently added Cryptocurrency.

The risk and returns are parallel. More risk mostly equals more returns. As common people, what scares us most is stocks and shares because we have seen people become bankrupt and lose money because of it. The major reason is short term trading. It is also important to note that the richest people in the world are rich because they understand the importance of long-term trading.

Nothing is to be feared, it is to be understood.

• Stocks and shares if understood and learnt properly can give good returns with experience. Those who are interested should read, read and learn. And target for long term investment. Stocks do not make you rich overnight.

• Cash and savings account are probably the safest ways to keep money. But they are just to keep and don’t grow. And with note bans, it’s a risk too.

• Fixed deposit and recurring deposit fall in the category of safe investment options as they are from good banks and have better security. But banks are vulnerable to market forces as well. They have 5-6% average return which is going to go lower in coming years as the country and economy progresses.

• The best option in my personal opinion is investing in mutual funds if you have lumpsum money and SIPs if you are a salaried person. They are safer than stocks as they invest in multiple assets and equities, debt and funds. And they give better returns (10-15%) than fixed and recurring deposit.

More About Mutual Funds

When you hear ‘mutual funds‘ it probably plays in you brain along with ‘mutual funds are subject to market risk. please read the scheme related documents clearly.’ It might look and sound scary but more knowledge and understanding is the key.

It is equal to buying shares of different companies, different sectors, different categories. This way you divide the return and risk. Even if two shares fail, other two will do good, for example.

• CAGR is the cumulative average return (here it shows for 5 years) – the higher, the better. The Expense ratio, on the other hand, should be as low as possible. It is the fee the mutual fund houses charge for our investments. As you can see you can invest from as low as Rs. 500. AUM is the total value of the fund.

• If you want to know where your money is invested, this is an example showing the details of a mutual fund. You can also find the specific companies invested in, in the scheme document.

• It’s good to invest in all the options and divide portfolio. So if one fails you have the other options. Public provident fund is a also a good option for long term investment.

• There are various mutual fund houses such as Canara Robeco, HDFC, Axis, Tata etc. that you can buy SIPs from. And there are aggregators who sell them under one roof such as Aditya Birla My Universe, Zerodha, etc.

• For shares investment you need a Demat account. All these just need your PAN and an ID proof, and maybe your bank statement. The process is pretty straight forward.

• Another new area to venture can be cryptocurrency, for example Bitcoin, Ethereum, etc. But a word of caution, it is still very turbulent and you should be ready for losses. Countries can ban it and you may lose all your money so be very cautious.

Don’t simply put aside money, invest and grow. And aim for long term. Any investment will show steady results in the long term.

There is some sort of risk associated with all investments. But there can be some assurance if you invest in good and trustworthy companies. Do your research and decide accordingly. The more you study, the surer you can be about your money. If you have any questions, just email me on thekaizenoflife@gmail.com and I’d be happy to help!

Disclaimer for Finance Nerds – Definitions are not by the book and meant for understanding only.