When it comes to making money all of us put so much of effort. We wake up early in morning, go to office, slog for 8 hrs and do what needs to be done to make sure we are making money. But most of us are lazy or ignorant when it comes to making some simple financial decision to make sure that our hard earned money is safe and growing. I used to be one till a few friends helped me think through finances and make the right decisions. Here are some simple money decisions that I learned in the last few years that you can take right away.
1) Save before you spend : Yes we all save- accidentally. For instance in the first 8 year of my work life I saved money after I spending it. Simply put all the money that was left in the bank after taking care of my expenses was my saving. All good. But here is a trap. Since there was no plan to save it, there was no plan to invest it.In the end I saved intermittently and invested nothing other than the mandatory tax savings through NSC. I didn’t benefitted anything from the rise of stock market from 3000 to 25000. So rule number 1: Doesn’t matter how much you earn you should set aside at-least 1/10th of that money for savings, every month without fail.
2) Don’t keep lots of money in savings account: We all are culprit of this. Most savings account give you 3- 4% or less. Fixed deposits will give you 8 %to 9%. By keeping money that you don’t need immediately in the savings account you are gifting away 4%-5% to the bank every year. Like Vivek puts it- imagine you are giving away a cheque of 10k every year to your bank because you can’t be bothered to make a Fixed deposit.
3) Buy insurance before investing: Buy a good term insurance to protect your dependents. Remember insurance is for risk cover only. This is the number one thing that we learn in finance in B school ( I will thank Prof Sriram for this lesson for ever) . So don’t fall for any fancy insurance plans no matter even if Warren buffet is selling them . Buy the cheapest term plan with maximum coverage from a reputable agency . Buy them online as they are cheaper online . Also buy medical insurance for the whole family. Once you are covered then only you should think about investing.
4) Understand inflation: Inflation is like a moth that is eating away your money. Currently in India its around 10%. This means that 100 Rs today is worth 90 Rs next year. So if you keep money in F.D then every year you are losing 2% of its real value ( inflation rate minus the F.D rate). So think of ways in which you can invest to beat the inflation. Stock market is one way to do that. If you don’t have time or inclination then you can look at mutual funds to invest in.
5) Marry for love : Yes probably this is the most important financial decision that you will make in your life . In the end remember money is the means to an end- A good happy life. So don’t lose sight of that goal.
Next post : Investing for future ?
p.s: I’m posting some learnings that I had in the last few years from my friend Vivek Joshi. Vivek has a very precise and dry sense in personal finance. Since he can’t be bothered to write these long posts I have taken this task for myself.