I have always been curious about personal finance, and hearing people talk about it piqued my interest. However, it wasn’t until recently that I began taking a serious interest in this topic and learning the basics of money management. I wondered why having a monthly paycheck and decent savings wasn’t enough to cover my money concerns. Trust me, I regret being nonchalant and not trying to understand this space earlier. In this blog, using simplistic language and step by step breakdown, I will discuss personal finance, investment options, and then share my own portfolio at the end. Every paragraph is a question I had as a beginner in this realm; so move around the blog as you like, take away things you find interesting, and feel free to come back to any part of this blog. The goal here isn’t to give you investing ideas or teach geeky stuff; instead, it’s to emphasize that simple techniques when done consistently over time will aid you in creating real wealth. Having said that, I’m not a finance expert or investment guru. I owe the ideas presented here to all the greats in this field. So, if you like the concepts discussed here then it should credit the stalwarts, and anything naïve assume it’s my error.
Where’s my money going?
Money is one of the most fleeting things in life. We earn, we spend, pay taxes and bills, and most of our money is gone away by the end of month. We try to save some but guess what – saving all your money in banks is equivalent to losing its value. Let me explain– the average interest rate on money saved in banks is between 0.01% to 3% in the world. However, the average inflation rate today (while writing this) is around 5%. For ease of understanding, let’s assume you buy goods worth $1000 every month. Now, considering the inflation rate today, it means paying $50 extra (5% of $1000) for buying the exact same goods. Long story short – saving money in bank is not a store of value. It depreciates. While you may feel happy seeing the numeric increase in your balance after every pay check, but be aware that true wealth is never created in banks.
How should I plan my money?
Before you start investing, the first wise thing to do is to understand where your money is going. Budgeting is the first step. I remember growing up as a kid, my parents always maintained a diary to log expenses. They would do it manually, and then look for expenses that could’ve been avoided – no matter how little. Of course, my sister and I weren’t a part of this exercise but it ingrained the value of money in us. Today, I try to do the same exercise – but in a much easier and effective way with technology. I use the Empower app that tracks my money and emails me an automatic weekly expenditure summary. It notifies me when I’m going over my planned budget, helps create an investment plan to reach my goals, and gives me visibility on where my money is going i.e. spending habits. Below are snippets from my personal Empower account – it will help you get a sense of how things look.
What are the different investments options available?
Just like in life, diversity is the key in investments too. Never put all your eggs in the same basket. It has to be a nice mix of different options that gives you a wide exposure. Below are some of these options.
Stocks:
This is one of the most conventional paths of investments that everyone knows. However, there is a caveat – if you aren’t an active or experienced trader then I’d limit my adventure here. Personally, I like to stick only to the top blue-chip stocks and not get too much involved in the tricks and technicalities of high-risk penny stocks. In short, stocks that are safer bets and let me sleep peacefully.
ETFs / Mutual Funds:
ETFs are Exchange Traded Funds. Just like mutual funds, ETF is as an entity that invests money on your behalf into multiple companies. Let’s say you want to invest in the top 500 companies but it’s not feasible to buy and track all those stocks individually. So, you pick an ETF that invests in those top 500 companies and do the leg work for you. Such funds are managed by experts and are relatively less risky than buying individual stocks.
REITs:
Buying and maintaining property can be a lot of work. To invest in real estate, you don’t just need capital, but also a lot of time and research. So, a great alternative is REIT. REITs are Real Estate Investment Trusts that invests in real estate companies, constructions, rental agencies, lands etc. It is just like a mutual fund or ETF and your returns are based on real estate appreciation, increase in rents and dividends. Unlike real property, you can sell REITs without a hassle and get your money back right away.
Crypto:
As we all know this is a high-risk high reward option with volatility. I use a technique to invest in crypto. Let’s say I have an investment of $1000 in bitcoins. I track its price fluctuations and wait for a 10% price hike. Once it does, my invested amount becomes $1,100. As soon as that happens, I take out my initial capital of $1000 and leave the rest $100 invested in bitcoins. Now that $100 is my free bitcoin investment. I preserve my capital and an asset is created almost out of thin air. It takes time to build this free asset, and sometimes your investment can take a hit too. So, take it with a grain of salt.
International markets:
Usually people trade in markets that are local to their country. In such scenarios, your return on investments mirrors the progress of your country’s economy. However, there are many countries in the world that are progressing rapidly today. Investing in such international economies would indeed give you a global exposure. There a ETFs/ Mutual Funds that are focused only on international markets.
Gold:
Gold was traditionally considered a store of value. Just be cognizant of the fact that physical gold that people wear or store in safes is not an investment. Its value depreciates. If you want to look at Gold as an investment option then paper gold / ETF is where you should start exploring.
Is buying house an investment? Should I buy or rent a house?
This is a common question we all face at some point in our life. It’s a big decision and needs a lot of curation because buying house is not just a financial decision, there is an emotional angle too. But if you pause for a moment and think rationally, you’ll be able to make an educated decision. Firstly, buying house needs preparation, mainly monetary. There are auxiliary costs too besides the cost of the property itself. Down payment, loan interest, registration cost, stamp duty, broker fee and general maintenance are some of those costs. Moreover, there is a psychological cost too i.e. pressure of paying EMIs, second thoughts on your decision, or mere regret of location. Secondly, people equate paying rent with paying an EMI to the bank thinking they are creating an asset for a cost they anyway have to bear. Let’s analyze this using Rental Yield concept. Stay with me here! Rental yield is the ratio of annual rent on a house to the cost of that house. For example, the annual rent is $20,000 when the cost of property is $500,000. So, Rental Yield is 20,000/500,000 = 4%. Meaning – you are paying just 4% of the total property cost to live in the house. Now, if you are buying a house, calculate the net living cost considering your mortgage payment, auxiliary costs and time period. I agree that profits can be made from appreciation of your property value in the future, but most of that profit would be offset by inflation and transaction cost if you sell in just a few years. Buying a house makes more sense if you have a stable life, no relocation, and intent on keeping it for a longer period. So, renting or buying house should be a more conscious and educated decision because if you are looking at it as an investment option then you have better options available.
How much should I invest?
In personal finance every portfolio is unique. I try to invest 30%. Its not an ideal ratio, but there is nothing like an ideal ratio. Invest as much as you can but make sure you do. Having said that, I do believe in the concept of pure savings too. Saved money acts as a safety net and gives wiggle room when you need immediate cash. I try to strike a balance between my expenses, investments and savings.
But isn’t investing risky? What about market volatility?
Yes, it is risky. But then what isn’t? Letting your money dry up in bank is risky, investing and losing is also risky. So, choose your risk in life. The key to minimize risk is to diversify your portfolio. Put your money into the different instruments of economy that are independent of each other. So, when a certain segment crashes, you are still able to balance your portfolio. Because, believe me, your investments are going to take a hit sooner or later, and when it does I don’t want you to lose your sleep over it. Every asset class goes through phases of underperformance. So, just look at it as a membership fee for being in the stock market club, you know, just like your gym fees. Millionaires are made during such crashes and recessions. It’s when the stocks go on sale. Investing in phases is the best way to invest in such times.
Lastly, what are passive income streams?
No matter how high paying your day job is, it is still paying you for the hours you work. Passive source of income, on the other hand, is independent of time. Its pay is purely based on the value of your work. Below are some of the passive sources of income.
Higher APY accounts – APY stands for Annual Percentage Yield, which is the annual interest earned on cash in your account. There are several finance services which offer up to 5% APY. Personally, I use Robinhood Gold that offers 4.5% interest on all my uninvested cash.
Dividends – Dividends are basically profits that companies share with their shareholders. Its an extra cash that you receive just for holding shares of a certain company. If you want to have steady source of this passive income then look out for stocks and ETFs that are high paying dividends. Dividends are paid per share. So, more the number of shares you hold, higher the dividend amount.
Rental Income / Physical property – If you own a property, either residential or commercial, that pays you a rental income then that’s an added source of side income. Not just you are getting a monthly income, the returns from your property appreciation adds to your profile too.
Intellectual property – Intellectual property is basically creating content that has value. A piece of creative art, or posting tutorials / training videos on e-learning platforms, blogging, vlogging are a few examples. It is a way of monetizing your skills and knowledge. Such streams of passive incomes take consistency and time to develop into a high paying source. If people find value in your skill, then you are paid even when you are out of work, on a sabbatical or even dead.
All the above discussed sources of active and passive investments are in reality sources of creating Assets. It may take time but the moment income generated from your assets starts covering you daily expenses, making your primary job paycheck supplementary, you are well on your path to financial freedom.
My investment portfolio
Closing Remarks
Wealth creation is a skill but you need discipline for it to give you real returns. I hope this blog has added some value to your life and I wish you wealth. Lastly, I’d like to leave y’all with a powerful quote that I came across. It is by Napoleon and the beauty of this quote is that you can put it in any situation and it will still be relevant, “Genius is a person who continues to do the average thing even when everything around him goes crazy.” Personal finance is not just about numbers, it’s a lot about such philosophies. This very quote may appear mundane right now but I’ll be elaborating it and few other philosophies in the next blog. So, if you have stayed with me until now, I’d like you read the Philosophies of Investment (link below). It will help you put things into a more expressive context. Also, on a relaxed evening, with a cup of coffee in your hand and drizzle outside, who doesn’t love to read philosophies, right?
Acknowledgements –
- Nick Maggiulli – https://ofdollarsanddata.com/ (Author of Just Keep Buying)
- Collaborative Fund https://collabfund.com/blog/
- Morgan Housel (Author of The Psychology of Money)
- Robert Kiyosaki (Author of Rich Dad Poor Dad)
- Podcast: Joe Rogan and Naval Ravikant https://www.youtube.com/watch?v=3qHkcs3kG44
- Ankur Warikoo https://www.youtube.com/watch?v=9yMg2RZE0Gc
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