A medium of exchange in an economy, one of the essential functions of money is to serve as a store of value, that is, of maintaining a stable and reliable standard of living.
Money is vital in an individual’s life, it also provides power to form an immediate bridge from your past to your future.
While it has multiple functions in any society, it is essential in financing a wide range of activities in personal and professional life.
Dedicate time to understand money and build a strategy for financial goals as early as possible. There are certain Dos and Don’t which serve a financial plan in the long run.
Timeless rules about Money
-
Save money
The first rule for money is to save it, or in other words, pay yourself first.
Shopping and discretionary expenses should be in a balance with your financial goals. Pay for yourself first i.e. save money for your needs and goals. If you save and invest you can accumulate wealth for your future.
Start saving early to allow more time for your money to have more opportunities to grow. This is known as compounding.
For example, you invest Rs. 1000 in an asset, and it generates a 10% return for you in the 1st year. After 1st year your investment + return will be = 1000 + (1000*10%) = Rs. 1,100. In the second year, it also generates a 10% return. The investment value after 2 years will be 1,100+1,100*10% = Rs. 1,210.
It is also recommended that one should spend what is left after saving.
-
Never rely on only one source of Income
“Never depend on a single income. Make investment to create a second source.” – Warren Buffett.
Portfolio planning involves diversifying capital into various assets.
Similarly, it is advised that you should not rely on only one source of income. To create a contingency source of inflow, develop an income from various sources to help you build your wealth. Investing is considered to be one of the second sources.
-
Avoid unnecessary expenses
“Beware of little expenses; a small leak will sink a great ship.” — Benjamin Franklin.
Living within your means is a great virtue for financial growth.
It is common to increase spending with an increase in income to upgrade our lifestyle. However, a balance has to be created in using that money today and harvesting it for tomorrow.
It does not mean that you have to avoid necessary expenses but rationalise it. your expenses are lower than your income by a comfortable margin- say at least 30-40%. This will help you build wealth for yourself.
-
Have an emergency fund
You can have an emergency at any point in your life, such as a medical emergency in your house, a sudden house/car repair, loss of job, etc. So, at that point, you should have enough money to meet your day-to-day expenses for upto six months to a year without splurging
If you have a working EMI or impending large outlays, ensure your emergency fund accounts for these as well.
-
Invest your money
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen.
Just saving is not going to make you rich, and finding investment instruments that beat inflation is essential. There are various instruments available in the market, such as equity, fixed income instruments, mutual funds, real estate, gold, etc., where you can invest. However, one should consider his goals, risk profile, age, income, etc., while creating a mix of assets.
Suppose, if you are 60 years old and retired, then you might not consider investing your money into equities as they carry high risk and have the possibility of even going to zero. On the other hand, if you are 27 years old and single, earning sufficient money, and are saving for retirement, then equity will be a good option for you as you will give your money more time to grow.
It is generally believed that allocation towards equity should be determined through this formula – 100 – age. So, if your age is 30, you can invest 70% in equity.
Based on risk, if you have a relatively high-risk tolerance and the time, then equity could be a better option for you. However, if you have a low-risk tolerance but want higher returns, then a bond might be more appropriate, where your capital will be protected.
One of the essential rules of investing money is to be patient.
The market will someday go up or down, but you have to stay invested.
For any investment to grow, it is important to stay invested for a long time.
-
Take calculated risks
Different assets provide different returns. The returns you generate will depend upon the risk you have taken. Expecting fixed deposits to give a higher average return than stocks, is impossible. This is because you are comparatively taking less risk in FDs than stocks.
To earn high returns and generate wealth, you need to invest in risky assets. But before investing, you should consider factors even time of exit and tax factors and then invest.
-
Diversify your investments
Diversification is an investing strategy used to manage risk. It says that rather than investing money in a single company, industry, sector, or asset class, investors should diversify their investments across a range of different companies, industries, and asset classes. This is because the risk will be spread out across different assets. If one asset class does not perform well, the other might and vice versa, which means the overall risk can be reduced.
Conclusion
In India, as of August 2021, there are 1.2 crores active investors against a country of 138 crore people. We have a long way to go.
To generate wealth, investing is very important. Investing will fulfill your financial goals and provide financial security and freedom after your retirement.
However, one should consider the risks involved in investing, consider the right investment vehicle, stay invested for longer and start investing as early as possible.
As said by Benjamin Graham, “Successful investing is about managing risk, and not avoiding it.”
To understand more about allocation of your money to meet financial goals, reach out to us at:contact@sbsfin.com