Browse Category: Finances

Why I need diversification of investment?

Why do I need to diversify my investments?

Very often we come across the phrase “you must diversify your investments in order to save yourself from swinging markets” while going through personal finance articles or during a meeting with financial adviser.

I am new to personal finance. The term “Diversification of investment” sounds quite confusing to me. Why to make my life complicated, if I have a bagful of money, I should go and purchase high performing stock of XYZ LTD and be done with my investments, sit back, relax and enjoy my retirement years? Right?

diversification-of investment

 

I do not know what is diversification of investment?
Diversification of investment is a common practice where your investments are spread across different asset class such that your exposure to any one asset class is limited. In other words you are not dependent on only one asset class to give you returns. This saves you from extreme swings in your net-worth in case of any financial turmoil in the economy

 

Ok, understood. Now why do I need diversification in my portfolio? How it is going to help me?
If you are inclined to stocks for the kind of returns they generate and If you keep investing all your money in stocks then you run a risk of exposing yourself to the volatility of stock market. What if when you need a chunk of money and stock markets crash just when you are about to withdraw? Similarly if you like to play safe and invest all your money in fixed deposits then you are reducing the value of your investments as inflation will eat up your money gradually. Hence you need a balanced approach based on your investment horizon and your risk appetite. You need to arrive at an optimized combination where you are not dependent on one asset class and also you are beating inflation so that your overall wealth increases. Diversification of investment if exploited can help you in wealth creation which in turn will help you in racing towards financial independence.

 

Ok, now tell me what are my options for diversification?
Broadly speaking there are asset class like share market, Government bonds, bank deposit schemes, commodities, real estate.

  • Stocks give high returns but there is a high risk factor associated with stocks.
  • Bonds are safe, they have guaranteed returns but the returns are very low. It is difficult to beat inflation when you are invested in bonds. Also bonds come with lock in and not easy to liquidate.
  • Bank deposit schemes give different returns based on the tenure of investment and the product you invest in. They are easy to liquidate and can be used to park cash effectively.
  • Commodities like gold and silver do not appreciate much but they neither do depreciate. They are usually stable even during market crash and also very safe during economic meltdown and in warlike situation.
  • Real estate is a big ticket investment. It gives you good returns over a period of time. Also the biggest drawback is that you can not part liquidate the investment from this. Though through REIT it’s possible now but if you own a property you can not part sell it.

Based on your risk appetite, you should gradually diversify your investment across all classes mentioned above. There are mutual funds that comes in all sizes and covering all asset classes which you can choose to invest your money. But you need to study a little in order to get yourself acquainted with the asset classes and mutual funds. This is not a rocket science but a study will help you to make an informed decision.

 

I am a conservative investor. How can I take benefit of diversification?
If you are a conservative investor, still you have to plan your investments such that you beat inflation which is the biggest killer of your money. As a conservative investor you need to pick the mix of Bank deposits, bond funds, debt funds based on the tenure of the individual investment. Also you will need a certain exposure to stock market so that you can beat inflation. This can be achieved through investing in balanced mutual funds or a small exposure to diversified equity funds. You can have a folio where you invest 80% in bond funds/ bank deposits / debt funds and remaining 20% in diversified mutual funds. Diversified mutual funds will reduce your risk by investing in a range of stocks across sectors and will give you returns which will make your overall folio beat inflation (hopefully)

 

I am an aggressive investor. How do I diversify?
Being an aggressive investor you should focus on generating maximum returns. Also at the same time you should be careful enough that you do not lose money during economic meltdown or stock market crash. You can have a good 60% – 80% investment in stock market and 20% – 40% investments in bond / debt funds / commodities. Here again mutual funds can help you as within stock investment you can further diversify by investing in diversified equity funds, sectoral funds like banking funds, pharma funds, infrastructure funds etc. You can also use mutual funds as vehicle to invest in bonds and debt funds. This will reduce your risk from exposure to uncertainty of stock markets.

 

Ok, all this is fine but what are major concerns with diversification?
The biggest concern with diversification is “over diversification”. It’s human tendency to worry a lot. If as an investor you worry a lot and over diversify yourself by investing across all asset classes with investments in too many sub-classes like all sectors covered by buying top 10 stocks from them. This will create a huge portfolio which will be difficult to manage over time. And also it is difficult to study each sector and re-balance portfolio if you have too many stocks with you. Also there is a cost associated with buying and selling calls each time you execute. Hence it is always advisable to keep the diversification to a level where you can manage it profitably.

 

To Sum up the diversification of investment
There is no generic diversification formula which you can apply to your investments and run your investments on autopilot mode. There are dependencies on time horizon of investment, risk appetite, investment goals, your knowledge about investment and your experience in the investments. All put together, it’s always better you yourself arrive at the diversification distribution of the asset class for your portfolio.

But one thing is sure, if you diversify well based on your risk appetite you can be sure to create wealth over a period of time and you can cut down the risks of wealth erosion due to economic meltdown or share market swings. This balanced approach will also help you in achieving financial independence quickly.

Happy Investing !!!

Accelerate your NETWORTH , Here’s HOW?

Here is a post on How to accelerate your Net Worth & achieve Financial Independence. Increase in net worth will accelerate your journey towards Financial Independence

Net-worth gives a clear measure of your wealth. In accounting terminology, net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities)”. Assets include cash and investments, your home and other real estate, cars or anything else of value you own.

 

how to increasse networth

 

Now when it is clear what is net worth, I am sure you would want it to keep growing at a healthy rate. A healthy growth rate in net worth will give you a confidence in your life with respect to your finances.

Here are some of the methods I am listing down which can accelerate growth in your net worth. All these steps are simple and you can implement them in your financial plan to stay on top of your finances and off course net worth.

 

  • Work towards paying all debts.
    Kill the debt with highest interest first. Usually the personal loan which we take for some holidays or some family function carry the highest interest rate. Same is with the credit card debt. Make sure that you get rid of personal loan and credit card debt. Then focus on getting rid of consumer loan which you took for buying that 85 inch cool TV, auto loan for your cool SUV. The EMI on these loans might look small but if you do that math you end up paying a lot in interest on them. Remember the price you pay for any item bought on these loans are the cost of principal plus the cost of interest. Once you are done with all high interest loans, target home loan. Yes, though you get benefit on home loan but a loan is a loan. The feeling of having freedom with no loan is something out of the world.

  • Increase your contribution towards the Employee provident fund.
    If you do not have PF – Provident fund account with your company, open a PPF account with any public sector bank and max-out the limit of yearly deposit in the first month of every financial year. These account ensures that over a long run, you accumulate enough corpus which can help you plan your retirement years they way you want.

  • Make a budget.
    This article details on how to make a basic working budget. Once budget is made, trim your unwanted expenses. Remember you will not be able to trim your unwanted expenses unless you make a budget. Be on top of your expenses and cut down all unnecessary expenses.

  • Do not let your extra cash sitting idle in low interest savings account.
    If you have huge amount sitting idle in savings account, it is losing its value. Currently savings account give only 2%-3% interest. And the inflation is 6%-7% which means your money is losing its value. Immediately put your money to work harder through mutual funds, sweep in deposits, fixed deposits, stock market based on your risk appetite. The returns in these investment streams are higher than the regular savings account and money in them ensures that you are beating inflation and not losing value of your money.

  • Start building a mutual fund portfolio.
    This is from long term perspective and invest into this through systematic investment plans across a diversified range of mutual funds consisting of diversified equity funds, balanced funds, large caps, mid caps. This does not need expertise, it only requires basic knowledge which is available freely on the internet.

  • Reinvest all the income generated from your investments.
    Do not blow away the gains from your investments. If you keep re-investing, it will help in increasing your investment corpus considerable and that too quickly. Also this exercise of yours coupled with the brilliance of compound interesting will accelerate your net worth growth.

  • Invest a fixed amount regularly, every month.
    Pay yourself first – this should be the mantra. Automate your investments. Suppose you receive your salary in the first week of the month, keep your systematic investment plan SIPs automated for the first week of every month. This will ensure that you keep investing every month without a break. Remember – the one who invests regularly and over a long duration reaps the benefits.

  • Invest all the windfalls you get. Do not splurge.
    Gifts and inheritance money can be very helpful in accelerating your net worth.  Remember more money you put in investment, more your investment corpus would be and more money it will generate.

  • Do not go crazy about new vehicles every few years.
    Remember that vehicles are merely an instruments for going from point A to point B. Also remember there is a huge cost associated with the new vehicles in terms of insurance, maintenance, running cost etc. And it is a fact that a vehicle loses about 20%-25% of its value the moment it comes out of the showroom and it is a depreciating asset.

  • Do not accumulate loans to purchase stuff.
    Every new loan you take is a liability and is a hindrance in your plan to financial independence. Every new EMI / monthly payment added to your monthly income will surely decelerate the net worth growth.

If you follow the above listed steps diligently and track your progress, I am sure you will see a positive movement in your net worth. You need to improve, evolve your approach constantly in order to see your net worth moving northward. Each one of us has different lifestyle, different expenses but what is discussed in this article are basic building blocks to improve your net worth.

Improvement in net worth will result in creating wealth and early financial independence. Don’t you want the same?

Making a simple budget to improve your personal finances

 

Making a simple budget to improve your finances. This is an important step in reaching your financial goals and financial independence

I am sure there will be many among us who have never actually attempted to make a budget or even noted down their expenses on a daily basis. Many of us would have never experienced the need to see all their income and expenses in one single sheet – which is more due to negligence than lack of knowledge.

How to make a household budget

 

 

Why budgeting is important?
All large companies and organizations do their budgeting, write their expenses, do regular audits in order to see if their actual spend is as per the budget or not. They hire specialists to do this job as they want to prevent any money leak and also they want to be on top of their expenses so that they don’t lose money in a big way.

 

How about budgeting at my personal level?
At personal level, we do not need the kind of skill level that corporations employ to do budgeting, but a basic work on spreadsheet which is not too much time consuming is enough. This is just to have a quick access to your financial status at any given day and to plan any expense which is not a regular one like purchase of a new car, or a foreign holiday.

 

I don’t have knowledge of accounting software / tools required to do budgeting
No worries. For keeping track of personal expenses and basic month on month budgeting, you need to be an expert in using accounting software or tools. As this is Information Technology era and all of us are well versed with MS office (MS excel to be more precise), which is more than enough to do the designated task of budgeting.

 

What do I need to do with MS excel?
First make a list of all your spend in a month. For starters, make four columns in the excel sheet.

  • First one should have the date of expense
  • Second should have the place where you spent the money
  • Third should have the amount you spent
  • Fourth one should be the category of expense (classification as food, grocery, housing etc)

 

how to make budget in excel

 

Every single expense, I repeat every single expense you incur should go in this excel sheet. Why? You need data. This data will make foundation of your budget. And the data accumulated over few months will give you enough food to analyze your spending pattern and believe me; it will help you save tons of money.

At the end of the month, sum up all. You will be amazed to see how much you spend, when there is no budget for expenses.

Now – sort these expenses by category. Sum up the money you spent in each category. This category wise spend will be the backbone of your budget for the next month.

Easy so far? Isn’t it?

Now make a new spreadsheet which will be the budget for your next month. Keep four columns in this sheet.

  • First is category name (housing, food & groceries, fuel etc)
  • Second is what I spent on category last month
  • Third is what I intend to spend in this month on the category
  • Fourth is how much I actually spent on the category (this will be filled once the month gets over)

budget summary - household

 

So many things to do? This looks little tough for me. Do I need to carry this exercise every month?
This might look little tough as you are not used to of doing this. Only the first cycle would take time, then it’s a kind of a cake walk. Once you have completed one cycle, format is ready. You only need to enter the data from month 2 onward.

Ok got it. Now how is it going to help me save money?
If you are making your budget for the first time, there are good chances that your spending is more than your income otherwise you would not be taking pains to make the budget. Once you have data for a few months – say three months you can see and analyze the expenses you have incurred in each category. If you are spending way too much on eating out or buying cloths, it would be clearly visible in the category expenses figures. You can dig a little deeper to check and see if you can trim these high spend category expenses which are not required for survival or which are mostly want related expenses.

Armed with the data of few months, you can repeat the exercise of trimming the unwanted expenses. The money which gets generated from cutting down unwanted expenses will improve your cash flow and will give you an opportunity to invest this money in order to generate higher net worth. This higher net worth in turn will lead you to financial independence at a quicker pace. Wealth creation is all about the art of increasing the gap between your income and expenses and keep investing the difference across the investment spectrum to generate higher and stable returns.

Budget is one of the major steps in road to financial independence. If you master the art then you can be assured of sealing the money leaks in your month on month expenses.

When you should start investing in stocks?

When is the right time to start investing in stocks?

Most of the people who start looking to bring their financials in order have a question in their mind. “When should I start investing in high return instruments?”

They are fascinated by high 20%-30% annualized returns from equities. They have some extra cash which they want to invest for some time and even before anything happens, they convince themselves into investing the spare cash in high risk equity markets in order to rush towards achieving financial independence.

 

stockmarket

 

This reminds me of one of my friend, who reaped exceptionally well returns during the dot com boom and used to tell me how easy it was to tame equity market and double your money in no time.

Unfortunately he had invested all his eggs in one basket that is into the stock market and lost big time during the 2008-2009 market crash. This friend of mine had borrowed a lot of money to buy stocks in hope of making big and that too very quickly. But things didn’t work out as he expected.

There are two basic investment criteria of investing in stock which every investor should consider before taking plunge in stock market investing

  1. You do not have high interest loans looming at you:
    This implies that you should not have high interest loans like personal loan, consumer loans, credit card balances and rotation of balance on credit cards etc. The basic home loan is perfectly fine as home loans create assets and the home you bought is giving you shelter. Stock market investments are high risk investments. If you have high interest loans and still you go ahead with investment, you might land in trouble. There is no fixed investment life-cycle in stock markets. Sometimes you may have to remain invested if market conditions are not good. This might affect your loan repayment ability if you are planning to pay off the loan monthly payments from the returns on your investments in stock market.
  1. You have sufficient emergency fund to bank on during emergency situation:
    Emergencies never give you written intimation before they come. Emergencies bring mental trauma as well as financial hardships too. What if you lose your job due to some meltdown and you do not have money to pay for utilities and your home loan? To counter this type of situation, you must have sufficient liquid emergency fund to pay for rents, monthly home payments (EMI), utility bills etc. Ideally you should have an emergency fund to fund your 6 months of unemployment which should take care of all your bare minimum expenses in case of emergency. This fund should be somewhere stacked in liquid fund which can be accessed quickly. Never put your emergency fund in debt funds, equity linked mutual funds, insurance or stock market. Idea is you should not depend on market conditions to take back your money.

Also, one more important aspect you should consider. Being educated, you should know what you are doing. Take charge of your investments as it is not a rocket science to do a bit of arithmetic before taking the plunge. You need not to be an expert but a basic idea on how mutual funds work should be alright to start investing into mutual funds. Central idea is to avoid the risks posed by high risk investments as a naïve investor.

Investing is fun, it can be highly rewarding but to enjoy it you must set your house in order first, explained above in two simple points. This will cover yourself from the risks posed by the high risk investments in equities and you can do proper asset allocation to counter the risks.

 

 

Why you need Insurance ?

Make sure you are adequately insured:

Definition of insurance: A promise of compensation for specific potential future losses in exchange for a periodic payment.

The definition clearly says it all. However, the companies which offer insurance provide a bouquet of products. Whole life insurance, term insurance, endowment plan, ULIPs, health insurance is some of the product categories. However, each classification may have one or many products with slight variation

Why you need insurance

 

Why you need insurance?
You never know what is going to happen in near/distant future. If someone is the only earning member of a family and due to health reasons, he is unable to work, or due to sudden demise of the sole earning member, family goes in no earning mode.

  •  Who will pay the EMIs of home loan, vehicle loan?
  •  How the monthly household expenses would be taken care of?
  •  How to pay kid’s school fee & tuition expenses?
  •  How to pay expensive nursing care? Hospital expenses are skyrocketing these days.

    Leave apart human life, what if your vehicle needs emergency repair? If the repair cost runs into few thousand of rupees and you do not have contingency funds at hand for this repair, it will be pain for you to arrange the sum and repair your vehicle right?

Answer to above questions in case of unexpected happening is INSURANCE. Insurance make sure that there are no financial hardships to family if something goes wrong.

Do your own research – A little bit of homework is a must

Do not assume that you need to buy insurance policy because your friend who is a salesman in insurance firm told you to do so. First identify purpose of buying insurance. Insurances can be of few types

  • Life insurance: The only purpose of life insurance is to provide safety net to the people if the person taking insurance dies a premature death. This is for the ones who have people financially dependent on them. This gives them means to offset financial losses in case of their demise. The best or rather ideal route here is to take term insurance policy. This is the least expensive solution and serves its purpose well. There are many online calculators available for calculating premium by various service providers online.Other life insurances like whole life policies / ULIPs are also available but they are usually not worth due to the cost associated with them. The investment returns from these products are poor compared to investments in other options.There is no benchmark formula, but general thumb rule is that take insurance cover equal to your liabilities plus 10 times of your annual income. So if you have a home loan + vehicle loan of INR20 lakhs, your insurance cover should be of INR20 lakhs plus 10X your annual income. 10 times of income will give your family a sustained monthly income to cover the expenses for family members
  • Health insurance: If you go back a little in history and compare historical cost of medical treatment, it doesn’t take rocket science to arrive at conclusion that the cost of medical treatment has gone up considerably. And keeping the trend, it will keep moving upward. You must insure yourself to cover the cost of medical treatment. There are host of factors on which the health insurance premium depends. But it is worth comparing offerings from different service providers and to take the best plan based on your requirements. Health insurance will safeguard you from cost of medical treatment and will save tons of cash for you. Also, a healthy family of four, husband, wife and two kids should have a INR8 lakh family floater health plan to cover emergency medical expenses.
  • Vehicle insurance: Vehicle repairs are expensive. Imagine a situation where your vehicle meets with an accident. The vehicle becomes immobile and you need to fine a tow truck. Then the cost of repairs which can break your back. As per the government rules, it is mandatory to take insurance and people usually opt for a third party cover in order to cover any litigation cost arising post accident. But you must opt for a comprehensive plan as there are a lot of costs associated with repairs once your vehicle is involved with an accident. Again loads of online calculators available and based on your needs, opt for the best plan that suits you.

There are other insurances also like home owners insurance, renters insurance, asset insurance, travel insurance but the most important and must have ones have been covered earlier.

If you are not insured and some mishap occurs, your financial plans will go haywire. Also taking proper and adequate insurance is one of the building blocks of financial freedom and wealth creation. Not taking insurance or not taking adequate insurance can make a serious dent in your investment portfolio.

Bottom-line is that one has to make sure that he/she is adequately covered through insurance, both for life as well as health.

Overspending – the biggest block in financial freedom

We dream about having nice things, big cars, nice homes, latest gadgets, fancy cloths. The moment we start working after graduating from university, we start accumulating the things we dreamt as a kid or student. Thanks to the media around us – be it print media, social media, electronic media, TV channels blaring advertisements 24X7. They make us convinced that if we do not owe the latest, we are not human in sync with the world. The tone of modern day advertisements is that we are inferior if we do not have the latest gadget, latest fashion.

Overspending - hurdle in personal finance

 

Once the income starts coming in Post University, we welcome all the stuff, toys to keep us happy. We submit ourselves to frequent outings with friends and relatives and many more things which we could not do being a student. Owing the stuff and frequenting restaurants is considered as a new COOL. Suddenly we feel urge to buy new automobile because all our peers have one. We want to outshine our peers hence we want the best automobile, fully loaded with all amenities – just to show off and in our heart we feel “we deserve it”. We look to get hold of the well deserved large house in the toniest neighborhood which we were eying from long. Consumer credit is readily available. This gives us a good excuse to buy the latest 80 inch 3D LED. Obviously we need these gadgets to flaunt ourselves in our circle. Also this reflects in the society that I am cool and doing well in my professional life.

We try to do everything except saving & investing money. It’s always good to pretend that we do not have sufficient income to start investing now and we will have much better success with investments when we have higher income than what we are earning now. A big chunk of our earning is dedicated to the monthly payments that are going out for the nice house, a big car, 80 inch 3D LED and many more gadgets which we have accumulated – just to show off that we are doing well.

This tendency to spend salary as and when it comes makes us struggle financially month on month. Every month we have a list of TO BUY and the list never gets trimmed. One item leaves the list, another item occupies the place. So what can we do if we are making 6 figure incomes and still struggling to pay for necessities to survive day to day life? We must put a cap on non – essential spending. Cut it down so that we have precious cash saved for essential spending and investing. It will hurt for a month or two, but we will not die if we do not have latest iphone 7 in our kitty or if we do not have the latest Honda or Toyota parked in our garage.

Unless we stop spending recklessly, we will not come to know what is essential and what is non essential spending.

A simple plan: How can we check overspending

1. Make a list of monthly expenses without which we cannot live like Home loan EMI (mortgage), electricity bill, maintenance charges, telephone bill, and internet bill. Mark them as NEED

2. In another list, keep all expenses which are our WANTS, like eating out, buying latest phones, new cloths, and outings during weekends etc.

Now once the list is made, strictly write every penny that you spend under respective list. Over a month or two you will get a very clear picture that what you are spending on essential items and what is being spent on non-essential. Cut down on non essential, put brakes and see the magic. In a couple of months you will have a very positive cash flow and loads of money freed up for investing.

This is basic money management, not a rocket science. We need not to be an expert in finance to make money work for us.

Overspending has to be tackled at the earliest if you are not having a positive cash flow month on month. Overspending can ruin your retirement plans and can even upset your life’s balance sheet. If you wish to retire early to pursue your passion, if you are looking for financial independence, if you want to generate passive income so that you do not have to depend on your day job – you must sit down and do the basic exercise to assess your expenses and come harsh on overspending.

Believe me; cutting down overspending can work miracles on your cash flow. You can free up a lot of money which can be invested judiciously to generate good returns over a period of time.

Habits of Financially Successful People

 

financial independence

7 Habits you can observe in financially successful people

I am sure you must have come across loads of successful people around you. It may be through media, social media, print media, or electronic media. I am also sure you must have wondered what makes them so successful. No doubt, there is hell lot of hard work that goes behind anyone being successful, but a successful person inculcates certain habits in their daily routine which makes their chances of succeeding much more.

Just like merely saving money cannot make you wealthy, it is same with success. It’s not only hard work, but smart working and making use of resources around you optimally make you successful.

One needs a proper plan and a proper execution both in order to get successful in any task. If you are preparing for any examination, you should plan in such a way that you cover your entire syllabus systematically and make sure that you do it well in advance of examination date. Also, getting fit and healthy just before during exam time is important which will ensure proper success in the examination.

Same holds true for financial success too. By financial success we mean a stage where you feel financial independence in your life – that is you no longer need to work for money. This is what is called as early retirement, where you “work what you like” – not “Like what you work”. As per some of the major financial planning books and personal finance websites, there are 7 common habits/traits exhibited by financially successful people

 

  1. They live their life “goal oriented”. This means they create elaborate plans for finances and keep changing them as per the external conditions to keep themselves on track. Measuring goals give them a perspective of what they are doing is on right track as per planning or not.

 

  1. They are organized in every aspect of their lives. They plan properly for every task, allocate proper resources and keep measuring the progress. This is true with the work they do at their workplaces as well as their personal lives.

 

  1. They are open to suggestionsplan adjustments. They are capable to adjust their plans with changing dynamics around them. This is must as a good plan has always scope of adjustment in order to achieve the desired outcome.

 

  1. They are action oriented. They take actions, quick in decision making based on facts and accept accountability of their decisions. Same is the quality of a good leader.

 

  1. They are frugal. This is the most common behavior among all millionaires. They stay away from lifestyle inflation. Lifestyle inflation is one of the biggest hurdles in financial independence and wealth creation.

 

  1. They are good team worker. They team up with spouses and near friends to work collectively towards the financial goals and plans. When you are a good team worker, you get inputs from all members and this ensures success of overall plan.

 

  1. They are persistent. They have plans, they work towards achieving the goals and they try out hard to work towards it. They do not give up easily. When a plan is laid out, persistence and perseverance can only guarantee its success. Wealth creation is all about persistence as it cannot be created overnight – except when you win a Jackpot.

 

Financial success is not an overnight affair. It requires a planned approach where you are persistent and it may take few years to take shape or see initial results. You may face many hurdles in due course, but staying put, fighting odds bravely can lead you to financial independence. You have to believe in yourself, stay focused and stick to the basics. There is no rocket science involved.

 

 

 

Recipe – How to be wealthy ?

If you blow up all the money you earn every month, you will always struggle financially

We all need money to survive in this world. The reason why you and I wake up every morning and doesn’t matter how dreadful is our job, we go to work religiously to work every morning. We go to work to pay our monthly bills, have a roof on head, have food on table for you and your immediate family, pay for the commute etc. These are all known as basic needs. Almost all of us earn enough to take care of our basic needs.

How to be rich

We all want bigger home, nicer car, to dine out in better restaurant, more and more nice and trendy apparels for our wardrobe, latest smart phones, latest gadgets and the list never ends. The reality is that a majority of working class spend their entire salary what they earn every month. By month end they have to wait for the next salary to come in to take care of their basic needs & never ending list of wants. This cycle repeats every month and the same way every year.

If the above description portrays what you are, indeed you are in deep trouble. Unless you hit a lottery, you can never be rich in your life. You will always be struggling with your finances. If you wish to avoid this financial struggle, you have to take control of the situation. You have to save money. Not just one month, every month and keep investing money such that it gives you returns.

 The key ingredients in the recipe here is

  • You have to spend less than what you earn.
  • Keep working towards increasing the gap between your income and your expenses.
  • This gap, you need to invest such that your money works harder for you to generate more money.
  • Repeat above steps month on month – year on year for as many years you can
  • One of the most important tip – Do not fall in DEBT trap

This is what is required to be wealthy. There is no magic to become wealthy. You have to change your mindset; the money you earn is not for spending in entirety. Once you master this, you are on right track. If you have control on your spending, you have control on your money and on your future finances.

There is only one magical formula “You have to spend less than you earn”

One you achieve this, you need to focus on investing the amount you save each month. It’s not just about investing – its about investing wisely to maximize your returns. Keep on repeating this for donkey years; – you will end up as a rich guy/girl.

Only thing you should focus is consistency in investing money. Yes, I repeat consistency in your approach of investing. Just like you earn a monthly salary – pay your investment kitty also a monthly salary. This amount you invest every month will keep on increasing your net worth.

“Money is not everything in this world, BUT money gives you a cushion which is a mean to survive in this world. ”

Money instill a kind of confidence in your life to take on life’s challenges.

Consumer Debt & personal finance

Malls are filled with loads of white goods showrooms. Not only they have latest models of TV (LED, 3d, HD ), refrigerators,  kitchenware, washers, dryers, food processors, microwave ovens, cutlery, music systems but also they buyers lined up to buy them. Hardly anyone buys all cash. Most of them lined up to buy stuff are through consumer credit.

 

consumer debt & wealth

 

One of the greatest hurdles in creating a positive net worth is consumer debt. With easy credit availability, everything in the market is available at easy EMI (equated monthly installments – monthly payments). This is luring consumers to buy anything and everything they want.

  • Our neighbor has bought a new 85 inches LED, so we must also get something similar, if not bigger.
  • I must have a new car to show off my status; after all I am working so hard.
  • I must go to Malaysia / Singapore trip this winter holidays as my neighbor had done this last season and they boast it a lot.
  • That Tissot watch is so tempting; I must have it alongside my Seiko to go well with my casual dressing.

The list is ENDLESS

Above are the lame excuses we make to ourselves to get into consumer debt. Since today’s generation is earning well, and coupled with easy credit availability, everything seems to be within reach. EMIs make us think that we can afford anything, but in reality, by increasing EMI burden, we are harming our savings and investments in the long run. What if a bad economy patch hits us, times are not always going to be on your side. Suppose you are out of job for few months due to a sudden slowdown in economy, how you are going to manage so called EMIs?

Consumer debt is like a black hole. Once we get sucked in it, it is impossible to get out of it. We get more and more tempted by LOW EMIs or low monthly payments. We are then not bothered about the percentage of our take home that is going out in terms of monthly payments towards these loans. Once we add up the processing fees, interest charged on the loan, the final costs escalates and this makes our purchase financially not feasible by the time the loan term ends.

We see TV’s , print media, online media all tempting us to buy something or other. We tend to flow with the marketing pitches and buy the items which are in WANT category. Sometime we ignore our basic NEED category and give preference to WANTS. These WANTS will not serve any good to you in the long run as they are negating your savings and investment potential. Remember in later years, these things are not going to support you. You need funds in terms of retirement savings to take care of you.

Avoid consumer debt like plague; invest money smartly for your retirement years. Ultimately you are the decision maker of your life and you have to make sure that these little EMIs do not end up denting your retirement savings.

There are some good credits and some bad credits. You need to wisely distinguish between them. Good credits increases your net worth in terms of appreciation of the item purchased and also they give you tax breaks. Home loan or mortgage is an example of good credit.

Consumer loans come under bad credit. You buy the stuff which loses its value considerably the moment it comes out of the showroom. Also, you pay interest, processing fees and you do not get any tax break on this purchase. It’s your choice now, what kind of loan you should pick for your financial independence.

Have you bought anything recently on easy credit?

Do not wait to invest

It is often said that “the best time to start investing is NOW!”

Do not be surprised with the fact that most of the new investors are always confused about what is the right time to invest. Quite obvious, the educated ones want to save their principal amount and with whatever knowledge they have gathered, they know if they enter at extreme market highs, they could stare at huge losses few years down the line.

 

right time to invest

 

Everyone knows that one cannot time market. Instead of fretting about when to enter the market, tie your investments to how long you wish to stay invested. Always associate a goal with your every piece of investment. Along with the goal, also try associating a timeline too to your investment. For example, if you start a PPF account – you have a time period of 15 years (lock in period) to invest. In addition to 15 years, you can add blocks of 5 years to this term. So now you can associate the goal of buying retirement home with the proceeds of maturity amount after 20 years. INR1,50,000 systematic investment for 20 years can yield approximately INR4,50,000 on maturity.

Once you start working, you have enough financial goals staring at you

  • Buying an automobile
  • Buying house
  • Finances for wedding
  • Starting a family
  • Kids education
  • Retirement planning
  • Medical expenses
  • Taking care of dependents

And the list can go on…..

Take control of your life. Be at the driver seat. Identify goals in your life, assign a timeline and start investments for specific goals. Do not wait for the next salary increment, next promotion, your marriage, markets to go high or markets to come down and any other lame excuse that you can come up with to start putting money aside for your retirement years.

There are enough indicators for you to start investing the moment you start earning.

  • If you are in private sector, you will not get pension
  • Due to betterment in medical facilities and healthcare, average age of a person is increasing. You may have to live around 20 years in retirement before you die or may be longer. How you will fund your expenses?
  • Inflation is eroding the investment portfolios at a greater rate than ever as medical costs, housing costs, energy and every other service cost is increasing at a greater rates.
  • Cost of education for kids skyrocketing
  • Day to day living expenses are increasing

Whatever your dreams about retirement are (playing golf, traveling etc); you have to make sure that you outlive your money. If it’s the other way round, you will have to struggle a lot to place food on your table.

As I had mentioned earlier, your money is your money and only you can manage it better. You will have to invest and make your money grow so that you have enough funds for the retirement years. This will make you not to rely on your children to feed you during your old age and you can maintain your self esteem.

Investment is not a rocket science. If you are reading this, you must be having access to internet and internet is the biggest source of information in today’s world. It does not take special skills to get information about various avenues for investments based on your investment appetite. There are plenty of online tools which can compute returns over a period of time, based on historical data. Use them to tune your investment planning and you are good to go. Most important is the first step. Unless you take first step, you cannot climb the stairs. Same is with investments. Study, identify your goal, associate a time period to it and take plunge. You will learn many new things and there is always room to correct your mistakes in this journey, but the most important thing is the first step.

Do not think that your real estate property will take care of your retirement years; this thinking has created many house rich, cash poor individuals. You have to spread out your investments, must have proper asset allocation so that you can earn a regular income from your investments in your golden years. If you do not know how to invest, where to invest, start reading and do not hesitate to take help of experts. Investing has to be continuous process, month on month, year on year till you retire.

Remember you have to outlive your money without being burden on your children.

Happy investing !!!