Browse Tag: investments

I am Too young to start with investments

I am Too young to start investing

“I have just started working last year. I am too young to invest.”
“I will invest once I have sufficient money. Right now my salary could barely survive by month end”
“Investments are for the later part of life. Let me enjoy now”
“I don’t want to invest my hard earned money now, I will do it later”

I get to hear above statements from a lot of youngsters who are fresh out of College, earning handsome income and are hell bent on spending all what they earn month on month.

too young to invest

Yes, but isn’t it true? Let me enjoy my earnings. I am a fresh pass out and I have a full 40 years of professional life ahead of me. I can take up investing later.

When you delay investments, you miss out on power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

Power of Compounding

 

I agree about the power of compounding. But I do not have spare money for investments. Many young professionals will not have any money left as the expenses are on the rise.

It is all about priorities. Since we know that most of the things in this world revolves around money, we have to give a certain level of priority to investments. “Pay yourself first” is the phrase widely used by financial planners across the globe. Instead of investing the money which is leftover after incurring all the expenses in a month, invest first and manage the expenses with the leftover money.

Once you make this a habit, you will become more responsible towards your finances.

And when you start young, you can amass wealth easily as you are giving time to your investments and supplementing your investment corpus by adding certain amount month on month.

I agree. But how to manage the expenses? Inflation is high and cost of living is rising rapidly month on month. If I invest my income then from where will I get money to pay utility bills and shop for groceries?

You don’t have to invest your entire monthly income. Take out say around 20% of your after tax income and invest every month. Manage your monthly expenses with the rest 80% of your  monthly income. Make use of the tools like Excel sheets for your benefit. Budget your expenses, cut down money leaks, increase your invest-able income and invest diligently.

Why you need insurance

Ok understood. Can you simplify this for me step by step?

There is no one sure shot formula for investments. But everything works on certain simple principles

  1. Start early – this will give you sufficient time to grow your money.
    Delaying investments? It can cost you DEARLY

  2. Budget your expenses.
    Making a simple budget to improve your personal finances
    A simple budget can save you from 5 big troubles

  3. Spend less than what you earn
  4. Invest your savings through proper diversification – consistently month on month
    Why I need diversification of investment?

  5. Cover yourself for any eventuality through health insurance and life insurance
    Why you need Insurance ?

  6. Have adequate emergency fund
    What is an emergency fund? And why you should have one?

  7. Don’t get into debt trap
    Consumer Debt & personal finance

  8. Don’t indulge in buying stuff
    Financial success : It’s not about the Stuff you gather

invest now
Bottom line is – it is your own money and you only have to take care of it.

Personal finance is not a rocket science but it requires your careful attention on money matters in your day to day life.

Happy Investing !!!

Want to enter equity markets? Index based ETF funds are the safest bet

Want to enter equity markets? Index funds are the safest bet

Most of us do not invest in equity markets because

  • We are afraid of stock markets as we do not know how they work
  • We think we do not have enough money for investments
  • We think that investment is something which is to be done when you are nearing retirement
  • We think we do not have basic education to invest money in stocks  

what are index funds

 

All have investments in mind but we love to delay it due to reasons best known to us. We all know that we have to accumulate enough retirement funds as we need regular income when there is no salary for us. Still we try to avoid investing money.

It has been historically proved that stock market gives the best returns on your investments. If one is looking to create a retirement corpus, stock market can not be ignored as the returns generated through them beat the inflation by a good margin.

If you do not know anything about equity markets, if you have never invested in equity markets / funds, still you have one option which is quite safe and which does not require you to be an equity market expert. It is INDEX based Exchange Traded Funds. Index funds have consistently outperformed markets and so called equity experts if you look at a longer duration. In fact one of the richest fellow in the world and a great investor Mr. Warren Buffet says “Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. Index funds make the best retirement sense ‘practically all the time’

 

warren buffet on index funds

 

So what are index Funds?

By definition, an index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500), BSE or NIFTY. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover

 

So what makes index funds safe as an investment instrument in equity markets?

  • Index fund is a way to avoid the risk that comes with picking of individual stock: Index fund spreads out your investment into the stocks which are top performing on any equity index. This way you are not buying individual stock, but a set of stocks which are like top performers of any equity market.
  • It helps you to buy not “the top company” but it lets you buy all top companies at a very low cost.

 

Costs matter a lot in the investment scenario. Most of the equity diversified funds charge a fund management cost of 2.5%-3.5% per year. In comparison to this, index funds usually have fund management cost of 0.5%-1% per year. So when you invest in index funds, you are already ahead of any equity diversified fund by 2%-3% and anyone who knows a little bit of arithmetic can say that over a period of 20 years this can make a huge difference in investment corpus.

 

Then why ETFs are not recommended by investment advisors / financial planners?

When you talk to an investment advisor, his or her salary is linked to the income they generate for the fund houses. More the fund management charge, more their salary. So it’s obvious that they would recommend top ranked funds which has more fund management charge than the plain vanilla index based ETFs.

There are no free lunches so anyone unless he has a personal interest can not give you honest advice regarding your investments.

 

about index funds


So what is the recommendation regarding index based ETF?

As pointed out by investment mogul Warren Buffet

  • Start buying index based Exchange Traded Funds (ETF)
  • Buy them every month through Systematic plan
  • Stay invested in them for a very long duration
  • You can bank on index based ETFs for your retirement plan
  • When markets are battered or down – do not panic, keep investing regularly. This will help you average your cost of investment.

 

If you stick to the points mentioned above, you do not have to worry about your retirement corpus.

So with index based ETFs:

  • You are saved from headache of actively managing stock portfolio
  • ETFs give you exposure to the gains of stock market over a long period.
  • You can plan your long term corpus goals for retirement / kids education with ease through index based ETFs
  • You can keep the cost of your investments low through ETFs.

 

Happy Investing !!!

Delaying investments? It can cost you DEARLY

Delaying investments can cost you DEARLY

When it comes to decision making about finances and investments, most of us like to postpone it to some other day. This stands true not only for decision making about investments but also for evaluating existing finances.

 

delaying your investments

Yes, I agree. Even I have not thought of investments as of now. Somehow I feel it is not my cup of tea and anyways my money is safe in bank, I can always invest it at a later date when I feel the time is right.


Unknowingly, you are ignoring an important fact that there is a REAL cost which is associated with the delay in investments. Most of us tend to get away with this as there are no immediate visible effects of these delays. Nor we proactively calculate the potential damage it can cause. 


Your money laying in savings account gives you 3%-4% returns whereas it can give you 12%-14% if invested in proper channels. Imagine the difference a 9% returns can make on INR10,00,000 over a period of 20 years. As per compound interest calculator – it comes to INR5,604,410


You realize this only when you need funds for a certain life goal. Then you realize that had you invested your money at the right place, you would have got much better returns. Be it while buying a car, buying a house or for kid’s higher education or a wedding in family. If you keep delaying, you need more amount as investment at a later stage to achieve desired funds. The early you realize this, better it is for you. You must know how to use the magic of compounding to your advantage.

 

What could be the possible ways to avoid this delay and properly set the investment cycle?


There could be many things responsible for the delay at your end. You first need to identify the problem which is withholding you. It could be

  • A large sum of money laying around in savings account
  • Multiple savings accounts you have opened over the years – each with certain minimum balance and other service charges
  • Some investments got matured, amount in savings account but no re-investment done
  • Your own belief that “this is not the right time to enter the markets”
  • Not taking any decision to exit from certain bad investment
  • Not nominating anyone for your accounts/ investments


Your reason for postponing investments can be many

  • You are too busy and you do not have time to build and manage your portfolio
  • You think that you do not have enough money to start investing
  • You are afraid of making some wrong investment decision and you fear losing money
  • If someone suggests some investment product and handover the brochure, you find it too technical to read and it seems decoding the product attributes is too complicated job for you
  • You are comfortable with what you know that is you have done some fixed deposits as they are simple and easy for you to understand. For this reason, you do not think beyond fixed deposits.


Rightly said, looks like I am also holding some of my investment decisions because of the points raised above. Now tell me how to break ice ad keep going strong on investment front?

 

You have to overcome your fear. To learn swimming, you need to enter the waters. You then need to test the depth of the water and then swim where you are comfortable. So

  • You think that you do not have enough money to start investing – Investments can be started with an amount as low as INR500 per month. If you keep thinking that you do not have enough money, you will never be able to start investments. Remember – “The journey of a thousand miles begins with one step.”

 

  • You are afraid of making some wrong investment decision and you fear losing moneyStart small. Start with products which gives you fixed returns and keep reading about investments. The only way to overcome your fear is knowledge about investment basics
  • If someone suggests an investment product and handover the brochure, you find it too technical to read and it seems decoding the product attributes is too difficult job for youDo not enter into complex investments. Start with basic and simple products which your bank offers over the counter like fixed deposits, recurring deposits etc.
  • You are comfortable with what you know To diversify and to make an optimized portfolio, you need to add different forms of investments at some point of time. Even if you are comfortable with fixed deposits only, you will still have to gradually add mutual funds, stocks, commodities etc in order to make your folio slightly more stable and to give you returns which are above the market inflation rate.

Do not delay your investments

 

You can take few small steps on how to start investments and be consistent with it

  • The key is planning – You must spend some time in evaluating your current status, identify the problems and plan the corrective actions based on your findings 
  • Study a little bit – Read finance blogs, magazines, read economic times and gain some basic knowledge about investing, mutual funds, equity markets, portfolio diversification etc.

 

  • BUDGET This is the most important step as it will tell you how much investible surplus you have for investments month on month. A simple budget can be made using this link

 

  • Automate investments – Do not wait till the month end to invest the leftover amount after expenses from your salary. Learn to pay yourself first. Your monthly investments should be done within the first week of the month. With the budget thing, you will know how much investible surplus you have for a month. Plan investments based on it and automate your investments. 
  • Review your investments every quarter – If possible, take stock of your investments every month. This will not only motivate you but also will keep you on top of your investments. You will have figures handy about your exact net worth, liabilities etc based on the monthly data you compile. 
  • IF NOTHING WORKS, hire a financial planner – Take professional help. But do involve yourself in planning and execution so that you can learn and you are aware of what is happening with your money. Afterall it’s your money. But make sure that you hire a good professional, not the local insurance agent who is always eager to sell you insurance policies.

 

We at wealth samurai always believe Your money is your money – it is you who has to take care of your money. None else is more interested in growing your money through investments than you. Whoever shows interest will have his/her personal interest attached in helping you. So take charge of your money, your financial investments, your budgeting and work towards achieving financial freedom

 

Happy Investing !!!

Goal based investing- A must to be successful with finances

Goal based investing- A killer plan which will always succeed

As per experts and veterans in personal finance, GOAL based investing will always result into success.

 

One of the keys to every project or every task is to have a PLAN. Same is with investing .You need to have a proper plan. Setting right investment goals can go long way in developing a proper plan that works for you.

goal-based-investing

 

Why do I need to set Goals for investments? I have money I can directly put that into stocks as they give higher returns and I am done with it. Every month I will keep buying new stocks with investible money.

 

Taking goal based approach will ensure the below

  • With goals in place it’s more likely that you end up saving required money before you reach goal
  • By having goals you have proper time horizon with you. This makes you to utilize proper asset allocation and minimize the risk by spreading investments across multiple assets over a period of time.

 

Why you invest money? You invest money so that in future the same can be utilized for various needs such as retirement, health care, education for kids etc. When you put money for investing, ask yourself a question – For what I am saving this money? IF you attach your investment to some of important goals then you know how much you are investing and for what specific purpose.

 

Ok, what could be the generic goals to begin with for an investor like me who is not seasoned and just starting?

 

Goals for investment can be

  • Retirement
  • A foreign holiday 2 years down the line
  • Buying a second home
  • Kids higher education
  • Kids wedding
  • Buying a vacation home
  • Upgrade of existing car after 5 years and so on

 

Good. but why goal setting is required for me? Kindly explain this to me

Below are some reasons why goal setting is important and required for everyone

  • Goals help you to avoid under saving.
    If you have planned to save INR10,00,000 for car upgrade in next 5 years and you set aside INR15,000 per month for the same, you would be able to accumulate INR9,00,000 after 5 years of term as principal and well over INR10,00,000 including the interest which will enable you to go for the purchase without scouting for money elsewhere.

 

  • Plan ahead for the goals – save less money
    When you plan for a goal like retirement which is say for example 25 years away, you need to set aside small amount per month towards it. You can also take help of equities as the investment term is fairly large. This will give you better returns as equities tend to give best returns over longer duration.  Same is applicable for the other goals too.
  • It helps you achieving the target more practically
    When you start investing keeping a goal in mind with some target amount – you have flexibility to tweak monthly investments towards it if the target amount value changes. This will help you in staying flexible and moreover you will be more realistic in your approach. 
  • Goals help you save for tangible outcome
    When you have goals, it’s more likely that you will achieve them.When you attach a real outcome, it’s more likely that you will work hard to achieve it somehow. Human is more motivated by real things than by some abstract numbers 
  • Your budget never goes haywire  
    With goals in place, you know how much your monthly spending would be. This will help you in doing proper budgeting month on month and you will be in control of spending and your budget will never go haywire

 

  • You can avoid debt using goal based investing
    When you associate goal based investing with every large purchase, you will have actual money to pay for the purchase. This way you can avoid getting into debt and can remain debt free
  • You can optimize your investment portfolio and maximize returns
    With a set target tenure, you get more insight into your portfolio. You Allocate assets based on the tenure and this way you have an optimized portfolio which means you manage the risk well.
  • You have guilt free spending money at hand month on month
    When you allocate your money monthly towards different goals, the leftover money with you can be spent without any guilt, without thinking that spending the leftover money will cause financial problems at a later date.

 

 

Thanks, I got to know a lot of things and with goal based investing I can do my financial planning in a much better way and the most important thing is I can avoid debt.

 

Yes, and above all goal based investing will make you a better and disciplined investor and can optimize your investments

Happy investing !!!

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.