Often I think why we don’t have any basic financial course at the school level. Did you hear some rumors that the government is introducing financial learning for young kids?
Most of the parents send their children to school so that they can pass exam over the exam to get the job. Everyone talks about how to make more and more money. No one talks about saving and investing for future.
Except some uncles (or bank advisors) who give you free advice on investing money in insurance products linked with saving schemes which promise to make you rich after 20-30 years.
Let me tell you one think – Most advisors sell you bullshit !!
You can not become rich by following the advice of people who are making money by making you fool.
You should learn yourself how to manage you own money.
What is financial management?
Financial management is taking control of your cash flow. Money is coming into your pocket and you control how much money should go out – at what time and in which direction.
Don’t think only finance MBA or CA have right to talk about financial matters. If you know how to make money, you must know how to keep that money with you (and preferably grow money with time).
I have seen enough people who earn well but still cry when they look at their drowning bank balance. They bump up their expenses with every raise in income. Their liabilities go up by 10% soon company announce salary hike of 8%.
Why? because they dump their well running old-car to buy a new sedan on EMI.
I am sharing my financial learning experiences with you. Let me know how helpful these are to you?
#1. Simple formula: Earning – Savings = Spending + Investment
Very simple to understand and implement, but what most people do? Earn and Spend, then save whatever left in the pocket. This is a bad approach!!
The message is clear & loud. No one can save without discipline.
I would suggest to people who just started earning money that start saving & investing early in life so that you can live a better life.
If you have an income of 50,000 per month then save 10-15% beforehand. Increase your saving percentage each year. Ask yourself, can you save 20%, 30% or 50% of your income? You may never need to look up to the bank for any loans in life.
#2. Make more than one source of income
Most people just think about it but never do anything to make a second source of income. No, I am not talking about getting married to earning person.
I am talking about creating investments so that money works for you.
- Invest in yourself. Build a skill which is sellable online. Design, Music, Teaching, Software, Writing – You can sell so many skills online today.
- Vehicle Rental – Buy a car for renting out.
- Invest in commercial property. I would anytime invest in buying shop rather than an extra apartment. Commercial property has high rent/price ratio, low maintenance, and ever growing demand.
- Invest in high dividend paying stocks. Sorry, I don’t recommend stocks. You can start your research on Screener
- Become part time tutor. Start teaching for one hour daily. It is an opportunity to learn new things and build your reputation.
- Become a consultant. Can you consult for property, investing or career, and make extra money?
- Publish a book and earn lifetime royalty.
- Become an insurance agent (but don’t make fool out of people)
#3. Spend on things you need (not what your neighbor have)
Unfortunately, people don’t buy based on their needs. They want to buy latest iPhone despite they have a well-working phone. They want to buy big sedan car despite their cute Maruti or Santro is running great.
This is a trick of marketing companies to sell you something whether you need it or not. You have to become conscious about your lifestyle. Even buying smartphone cost you more than its market price if you use it unconsciously.
#4. Emergency Fund
Always set up an emergency fund, does not matter you are earning high or low salary. An emergency fund is you own banker at home. You don’t have to worry about money if some unexpected happen in life.
But don’t consider it your money. Don’t spend to pay this month EMI because you already spent all of your salaries. This is an Emergency fund, not Stupidity fund. Save money in an emergency fund which can last for at least 6 months if you lost your primary source of income.
#5. Goal based savings
Set a goal and starting saving to meet your goals. This is an effective way of disciplined saving.
Set goals like Marriage, Child’s education, Foreign vacation or small things like Furniture or LED TV.
Divide goal amount with the number of months to reach the goal, if your goal is 36,000 rupee for buying LED TV in 12 months then you need to save 3000 rupees every month. (Actually less than 3000 because you will receive interest on your saved money every month)
#6. Learn basics of investing
You have to learn basics of investing money. You should know what is a difference between simple interest and compound interest. You should know what does it mean to invest for short term and long term.
Know your risk appetite. Take decisions based on your expected expenses in future.
You must understand that no one is going to help without his own benefit. Don’t give your money to someone to invest on your behalf. Take control of your own money.
#7. Stock Advice is piece of shit
Don’t invest into stocks because your friends made double last year. On the flip side, don’t afraid to invest in stocks because your another friend lost all his money in stock market.
The stock market is risky, at the same time rewarding. This is the reason that market is full of advisors who give you tips for buying & selling stocks.
Have you observed most of the tips are for buying stocks!!
Ahh… isn’t it an eye opener for you?
No tips are going to work for you because these tips are not working for themselves (the advisors). They are making money on selling tips not by investing their own money into stocks.
They are like the poor Pandit on the street who claim to improve your fortune, but himself living a beggar’s life.
#8. Reduce Borrowing habit
Never borrow to buy something that loses its value with time. Never borrow for liability. Your LED TV, Laptop, Smartphone (in fact all electronic) all are liabilities. Not only its value erode with time, they need money from your pocket every month for operating & maintenance.
You new sedan car is a perfect example of liability (if you already have one car), for which you just availed an auto loan. Getting loan on one car (which is a need) is fine as long as you pay and finish the loan on priority.
#9. Don’t fall into EMI trap
EMI, EMI, EMI – Interest free EMI.
Banks are shouting day & night, credit card companies are willing to convert your payments into EMI, Smartphones which are out of your budget are available on EMI, virtually you can buy anything on EMI.
Avoid EMI other than your home loan & car loan. It’s alarming if you are paying EMI of more than 30% of your income. Banks & companies have set EMI trap so that you can buy things that you don’t really need.
Be aware, be safe !!
#10. Don’t invest into ‘Double Your Money’ schemes
I met people who invested in these schemes and lost their 100% money. Some early members of these schemes make good money because most of these money frauds are run by the refferal bonus.
It is known as the big fool theory. Someone enroll you in the scheme and you realize after some time that he made a fool out of you. Now you go to the market to find a bigger fool, luckily you find one who invests in your scheme. Now you need to enroll 3-4 members to recover your money.
These 3-4 members will also do the same thing. This chain will keep going unless last node of the chain can’t find any bigger fool. Consider them as biggest fools on earth.
Now is the time for this company to disappear overnight. The people who recovered their money will also lose some money because they enrolled all their family members & friends into this scheme with confidence.
#11. Buy Medical Insurance
You don’t know when you need medical care. You must buy good medical insurance for you and your family. (even when your company provides you medical insurance).
You must know that medical insurance is null & void from the day you leave your job. There is always some waiting period to avail benefit of new insurance.
Find medical insurance which have sufficient coverage amount for you & your family. Insurance is the only product where everyone want to lose the money.
No one wants to get ill or hug an accident so that he can admit at hospital to recover money from insurance company 🙂
#12. Get Term Insurance
The only insurance you need apart from medical insurance. Ignore rest of the insurance plans which will only benefit your insurance advisor & banks.
Choose insurance company which have a good history of payouts (like LIC). Select coverage amount which can take care of your family for a couple of years (not just couple of months).
Bonus Tip: You don’t have to buy term insurance if you don’t have any dependent.
#13. House Rent
Don’t spend more than 25% of your monthly income on house rent. This is a formula that I have used over years and this helped me maintain my finances.
I was paying the rent of 10,000 when my salary was 40,000. I was easily saving 5000 monthly at that time but if I had chosen a house of 15,000 rent then I would have saved an egg (zero).
#14. How to repay Home Loan
I would prefer to buy home without taking loan but it is almost impractical today. Avail loan but not 85% of total value as advertised by banks. Take as much loan as you can pay EMI without compromising your lifestyle.
If you are paying 8% on the home loan and you have the option of investing money somewhere else at 12%, then go with later option. Emotional decision would be to pay home loan first, but you should rather take rational decision.
If your loan interest is 10% then you don’t have to put your money into FDs which pay less than 8% (after TDS). Pay your loans first.
You know, debt free life is recipe for peaceful sleeps at night.
Select your Bank carefully before taking loan. Some banks do not allow you to pay loan in advance (even if you do they charge you same interest). Pay your loan early than it’s tenure. Get out of debt as soon as possible.
#15. First pay loan with highest interest
If you have multiple loans like education loan, home loan, car loan and personal loan – then get rid of the loan with the highest interest. I was having all these loans few years back.
Slowly, I paid all my debts. Now I have zero debt and gladly surviving on little income after leaving my job last year.
If you have credit card debt then pay it first. Credit card companies charge insanely interests in India. Interest on personal loan and credit card balance is between 18-36%. I would empty all my bank accounts to pay such a debt.
#16. Make Credit card your friend not enemy
Credit card can become your friend in multiple ways if used wisely. When you shop on a credit card you get around 50 interest-free days.
Credit cards come with different perks at the different times. You will get sign up bonus points & rewards. You will have discounts & deals on various websites, hotels and restaurants. There are credit cards for travel, cash back, dining, and rewards. You can choose one of the cards from best credit cards in India.
#17. Stay into budgets
Don’t spend out of your budgets, no matter what.
This sound simple but something comes up every month that we have to spend money over the budget. Sometimes it’s birthday, anniversary, shopping for cousin’s marriage, insurance payment of car or some unexpected expense.
Calculate all expected expenses in one sheet and keep some money in buffer for unexpected funds. Plan a budget and spend within limits.
No one except you can make yourself disciplined.
#18. Get Acquainted with Taxes
You should know a little bit about income tax and tax saving instruments. You don’t have to learn every rule about taxes, CA and accountants are there to help you out. You have to get familiar with taxation so that you can save money on taxes.
#19. Prioritize Everything
If you start doing everything at the same time then nothing gonna work for you. Prioritize based on your aspiration and future plans.
1. Do you have any big expense in coming 2-3 years? Like your marriage or sister/brother marriage? Any plan for higher study? Planning for a child? Planning big vacation?
2. If you have short-term money needs then invest for short-term instruments like FD or NCD where you will get sure shot returns.
3. If you don’t need money for next 4-5 years then look for mutual funds and stocks.
Don’t invest anything anywhere until you have established your emergency fund, medical insurance, and term insurance.
#20. Protect your financial documents from misuse
I was surprised to see PAN card numbers which were publicly displayed on train seat charts. I wonder how people can be so careless, but people are.
PAN card and Aadhaar card are important financial documents which should only be used for banking and taxation purpose. These two documents are equivalent to Social Security cards in USA which people keep at home.
Your financial information can be misused with your PAN & Aadhaar card number.
You should never use PAN/Aadhaar as address & identity proof documents. You should choose alternative options from your Driving License, Ration Card, Electricity/Water Bills, Passport, Voter ID, Bank Passbooks.
#21. Do Spend, but wisely
Life is just a waste if we keep on earning & saving but not enjoying. Money is not everything, in fact, money is nothing if you are not happy in life.
Celebrate your life. Do whatever that makes you happy. But be responsible for your actions.
Money management is not that hard that everyone is telling you. You just have to take it seriously. Start with one step at a time. Learn and share your knowledge. Ask whenever you are in doubt.
You will find many people who want to really help you but at same time people who want to take advantage of you.
Be Aware. Keep Learning.
If you save me today, I will save you tomorrow – Your Paisa
If I missed something then let me know. If you liked the lessons then let everyone know. Your friends also have the right to live a better life by taking better financial decisions 🙂
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