While money doesn’t grow on trees, it can grow when you save and invest wisely. Money may not add happiness but lack of money definitely multiplies misery. Knowing how to secure your financial well-being is one of the most important things you will ever need in life. If you think parents are not for emergencies and children are not for retirement, then only you will be on your own. You just need to know few basics, form a plan and be ready to stick to it. No matter how much or little money you have, it is important to educate yourself about available opportunities. Financial freedom should be the ultimate status symbol. You can vastly improve your financial life the moment you decide to withdraw from the race of keeping up with your neighbours.
Savings
Let’s start with savings. Save money is the most boring advice. But this is the whole foundation on which everyone's financial life is built. Always take expenses for granted not the income. Every increase in lifestyle should be matched equally or more by savings. That is the right way to strike a balance between present and future. If you spend more than you earn, you won't have anything left to spend once you stop earning. You cannot be a good investor without being a good saver because money is the raw material to make money. Many say they would start saving when their income grows. If you don't save when income is small, you're unlikely to save when income grows. Know that you are saving enough. You should at least save around 10% of your income. If income is high, prefer around 30%. Inadequate savings forces people to chase high returns. They make not one but two mistakes of saving less and risking more. Remember that there is no substitute for high savings. Saving more, reducing some consumption is a pain during working years. Not having money for necessary consumption is a pain during retirement. Pain today or tomorrow? Choose wisely. For early financial independence, compete with others on savings and not on spending.
Investments
You know savings would prevent poverty but it is investing that would lead to riches. The only way to really learn investing is to start investing. It's not how much you earn, its how much you save. It's not how much you save, its how much you invest. It's not how much you invest; it's how well you invest. It's not how well you invest; it's for how long you invest. It's not just any of these, it's all of them.
Whenever you're sure and certain, the god of risk laughs at you. So don’t think of returns first, otherwise you will end up with high risk. Those who think risk first ends up with moderate returns. Always think of risk before returns to improve your investing decision & outcome. When your needs and wants are fulfilled, how does it matter if you earn lesser returns than others? Investing should not become a rat race. Spend less money than you make. Save the difference and invest that in diverse portfolio of great companies. Equity investment is the only way forward. But don’t invest short term money in share market however attractive the opportunity might be. Markets can surprise you negatively and you would not be able to meet near term goals. You’re ready for investing in the stocks only on the day you stop asking others for the names. Till then, stick only to mutual funds.
Every investment style goes through both good and bad times. Consistently sticking to a style ensures that you reap the benefits when good time happens. Frequently changing the style may make you miss all good times and possibly can even make you go through all bad times. Have an investment philosophy. Without one, you would not know what to buy, when to buy, how long to hold and when to sell. It is difficult to be successful not knowing these. Not only good investors have an investment philosophy, they stick to the same all the time. The best investment strategy is the one you can stick with through ups and downs.
Debt or Borrowing
One of the most crucial aspects of wealth creation is not to borrow money for investing. Borrowing is nothing but spending money before earning it. Zero debt is the biggest asset in today’s time. Having no debt is a greatest hedge against uncertain future. Let me tell you why debt becomes a problem. When common sense says no, debt says it is possible and ultimately common sense wins.
Except home loan, don't borrow for consumption. You think that you’re borrowing from banks but the reality is that you're borrowing from your future. Many of the cars you see on road are not owned by individuals but by banks. You must be getting various marketing calls for credit cards. Credit card is useful only for those who don’t need credit. For all others, it is the most expensive form of borrowing. Businesses can borrow within limits as these loans are not for consumption but for productive purposes.
And if you're addicted to debt then you need to experience loss of income once. That would teach you more than all personal finance books combined. The primary understanding for an investor should be that there is no easy money. Wise people invest today's income for tomorrow. Not so wise borrow from tomorrow's income for today. Work for your family. What is the pleasure in working for lenders? Strictly avoid debt. Trust me debt is bad. Repaying debt through another debt is worse and signing surety for someone’s debt is the worst.
Wealth Creation - Direct Equity, Mutual Funds & Compounding
Let’s understand wealth now. Wealth is in what others don’t see like Mutual Funds, Shares, Bank, Demat accounts etc. Loans are generally what others see: Huge house, luxury cars. It is your net worth and not income which denotes your wealth. The real secret to wealth is to spend less than you earn, invest the difference and do it regularly for not less than a decade. If you feel 10-15 years is too long for wealth creation, please come out of this mind-set. Otherwise you may never create wealth. Very few have made it in shorter time frames. Remember that there is no other way than the hard way for most of us. The universe does not conspire to make you rich. In fact there is no need for any conspiracy. Save well, invest prudently and give long time. No conspiracy. No secret. But you become rich.
You need to save money through your career and use it to build wealth in stock markets or mutual funds. Investing in equity is the only way forward. If you are investing in direct equity i.e. Share/Stock markets then prefer a focused investing. That means invest in maximum 15 companies. There are around 250 trading days every year and there is a headline for almost each one of them. Our mood swings according to the headlines. 250 trading days per year make it 2500 days for a decade. Major portion of a stock's return in a decade happen in 70 to 80 trading days. This means what happens in 3% of the days decides your decadal returns. Don't time the market. Stay invested with good companies. For seven long years, from 1999 to 2005, Nestle’s share price was range bound. If an investor would have sold out of frustration, he would have missed the share price multiplying 10 times in subsequent 8 years. This is how share market works. Businesses grow on a timescale of years. If you want share prices to move on a timescale of few weeks or months then it reduces your critical asset - patience. Learn the techniques of being unemotional & sitting tight while creating wealth through equity markets. Don't think of buying multiple stocks in one year. Buy one stock for multiple years.
If you want to invest in more than 15 companies, think of mutual funds straight away. There is no need to learn hundred different things about macros, micros and markets. Just do one thing. Do SIP every month without breaking even one installment for next 10 years. Choose index or few diversified equity funds. You'll really do very well. Remember SIP is useless for those who stop it when the market is high. SIP is useless for those who do it only when market is low. SIP is useful only for those who invest across market cycles.
People forget what was taught in school days - Compounding. Compounding is nothing but making time work for you. Yes, initial years of compounding are very boring. Despite slogging and saving, corpus would grow only slowly. Big wealth would seem to be a distant dream. But the effect of compounding kicks off only after few years and then it picks up momentum. Returns start piling up at a much higher pace in case of compounding. Patience and persistence is the key. Young people may not have much money. But they have something more coveted: Time ‘n’ is such a powerful variable in compounding.
There are periods of high returns, low returns, no returns and negative returns. We need to go through all these to get long term returns. If someone keeps reviewing value of his house every day, we may suspect his mental health. But that’s what we keep doing with our portfolio of shares or mutual fund investments. A big part of your success as an investor is your ability to mentally, emotionally and financially get through the periods of under performance. Remember conviction is not proven on the top of mountain, it is proven in the valley. Start of the new decade is round the corner, so don’t wait further. Be your own and get started with your journey of financial independence.
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