A comprehensive guide of financial tips:
Do not fall in DEBT Traps- Do you get tempted to take a personal loan to buy a phone or go for vacation? This is called DEBT Trap. If you want to buy something, try to save first. Don’t just buy because it is on EMI.
Understand the difference between asset and liability: Having a car is not an asset. It consumes fuel and has a maintenance cost. Though a car is required, but make sure you invest more on things that generate income for you rather than things that cost you more.
Plan your financial goals: When do you plan to buy a car? When do you want to go on a Europe tour? Plan your financial goals as this will help you save money and invest in right platforms. A short-term financial goal like buying a car should be invested in the debt instrument. Long-Term financial goals like retirement should have more exposure to equity. A medium-term financial goal like Europe trip should have a balance of both equity and debt.
An emergency fund is a must: Always have a handy budget of at least 6 months of your expense. It might be required in any personal emergency. This will also ensure you don’t break your monthly investments in SIP.
Life insurance is not an investment: While life insurance is a must, it is not an investment. Hence you should always opt for a term plan and never go for the endowment plan.
Medical insurance is extremely important: With the rising cost of healthcare, medical cost is raising multifold times. A few days of hospital care can cost you a fortune. Hence make sure you get medical insurance for you and your family.
A credit card is a boon if you pay on time: Credit card can help you save a lot of money, get awesome rewards like free airport lounge access, buy 1 get 1 movie ticket, etc. However, if you don’t pay on time, you would end up paying 30–40% of annual interest and mess up your life. So make the best use of it!
It is not about how much you earn, it is about how much you save: You might earn a fortune but if you spend everything then your wealth would still be nil. A person earning Rs 100k a month and spending 95K saves less than a person earning 50K and spending 40k. Make sure you save and invest your money.
Understand the power of compounding - It might sound cliche but a lot of people do not understand the power of compounding. Compounding is nothing but interest on interest. The amount of money it generates in long-term is unbelievable. Hence, plan your retirement from day one of your income.
Saving is a habit - Develop a habit of saving your money right from a very young age. Even if it is a small amount, please save. It is about developing a mindset for savings and making it a habit. Small savings today will compound to huge returns tomorrow.
Learn the basics of finance - Just like we learn a language, it is equally important to learn the basics of finance including how to read a balance sheet and profit and loss statement. This knowledge is the foundation of your investment knowledge.
Do not depend upon anyone for investment - It is your hard earned money and you should know where is your money invested. A lot of so-called experts would recommend you the investment option but you should first understand the instrument where your money is invested. It can be stock market, mutual fund, real estate, etc. Once you learn the basics of finance, learn more about each investment option.
Investing is not rocket science - You don’t have any financial background? Don’t worry. If you can do basic math of addition, subtraction, division, and multiplication then you can learn about investments. It is my personal experience.
You don’t need a broker for stock, mutual fund, and life insurance - With the introduction of brokerage free platform, you can save up to 1% of commission. This 1% can save a lot of money in the long term. However, you need to follow point number 11, 12 and 13.
Expense ratio has an important role in mutual fund retuns: If you see a mutual fund generating 12% return then you will not get 12%. It excludes the expense ratio. So if the expense ratio is 1.5% then your returns would be 10.5%. On top of this, you have to pay a 10% tax on LTCG (Long Term Capital Gain) in India. So effective return is 9.45% (90% of 10.5%). Always ensure you chose a mutual fund with a lower expense ratio.
Don’t be greedy, have patience - You can’t expect to double your money in 6 months or a year. Don’t be greedy and stay away from day trading in stock and futures and options. Have patience and wait for your investment to give you a good return in the future.
You can save a lot with Discounts - Always make sure to check for discounts before spending your money. Be it shopping, buying groceries, restaurants, flight booking, hotel booking, taxi booking, entry fee to a famous place, etc.
When it comes to investment, there is no “One Size Fit All Approach” - Your dad investment options would not be the same as your investment options. Do not spend in a stock or mutual fund just because your friend is also investing. Each individual has a different risk profile, different financial goal, different investment horizon and hence a different investment profile.
Make an excel file to keep a track of your expenses - Most of the people complain that they don’t know where is their money flowing. They earn a lot but their pockets are empty by the end of the month. Hence always keep a track of your expenses and budget according to your plan. If not everything, at least note down the major expenses.
The best investment is on yourself - A bit cliche statement but a most important one. Make sure to invest in yourself by reading books and gaining more knowledge, eating healthy and having an active lifestyle, updating your skill set and increase your value.
There is a difference between being frugal vs cheap - A frugal person values the money and spends economically whereas a cheap person just saves money irrespective of value. Be frugal but don’t be cheap.
Inflation shrinks your money - With 5% inflation, Rs 100 would be equivalent to Rs 95. Hence, make sure you do not keep your money in a savings account as it gives 4% return. Therefore if you have Rs 100 in your bank then after a year it will be Rs 104 but with 5% inflation, it is equivalent to Rs 99. Today, you might think that Rs 5 crore is enough after 20 years but with 5% annual inflation, the value of Rs 5 crore would be just 1.8 Crore.
Avoid lifestyle inflation - An urge to move from 2 BHK to 3 BHK or upgrade the car is a part of lifestyle inflation. If you get a hike of 20% but your expenses also increase by 20% then it is lifestyle inflation.
It is not about the destination but about the journey - You can’t spend everything as well as can’t save everything. It is important to maintain a balance between savings and expenses.