The rich are fascinating. Often movies would star their protagonist as a multi-millionaire, with a mansion as big as 50,000 square feet, travelling places in their private jet. Despite the opulence, the movie would depict problems in their life. And we would end up receiving morals like, “No matter how wealthy you are, money can’t solve all your problems” or, “Money doesn’t buy happiness.”
The flaw with school is, it instills the idea that if you have a generic profession, you will make a lot of money. But they never explain to us the concept of money.
This is because school teaches us that the right way to make money is to have a regular job, and pay taxes. It instructs us that anything to do with wanting to make excess money is greed. Our schooling system doesn’t explain to us how to handle money or be financially stable in the real world. It teaches us how to live a mediocre life at best. It’s almost as if dealing with money is considered taboo. They don’t tell us that no matter what profession you are in, everyone has to manage their finances. If not to become rich, at least for fundamental sustainability.
So if you find that you are not old money rich and neither does your family doesn’t have a million dollar business for you to take over, then what are the options you have?
The difference between the rich and the rest is in their financial literacy. Even people that are born with plenty of money can lose it all if they don’t have the proper education to maintain it.
As we all set out on our career path, we start slowly getting familiarized to terms like CTC, Salary in Hand, TDS etc. Everyone should frame an idea about how much they would like to set aside as savings from their monthly income. Now it is time to look at how we could grow these savings apart from the obvious schemes like a fixed deposit on the bank.
Step 1: Always save before you spend
Everyone is familiar with this rule. But we need to understand the depth of this statement. Saving doesn’t mean you keep your money where it stagnates. It means a majority of your income should be used in ways to generate more revenue. Examples include saving this money in a fixed deposit, investing in shares and mutual funds etc. As quoted in the personal finance book, Rich Dad Poor Dad, “Don’t work for money, make your money work for you.” By investing money, you don’t need to pay much attention to it, and by making smart choices, you can sit back and watch your money grow without much effort.
Step 2: Educate yourself
Do you know what’s more important than making money? Education about how it works. So here are some examples of different forms of investment.
When companies require more money to grow their business, they invite the public — people like you and me to invest. This is done through a process called issuing and buying of shares. When you buy a share, you become one of the owners of the company. The most exciting thing is you wouldn’t be an owner just of the namesake. Whenever the company takes a crucial decision, you will have voting powers in proportion to the number of shares you hold. The cardinal rule in earning money from shares is ‘Buy at a lower price and sell at a higher price’.
Just like companies asking you to be a part of their company by buying their shares, the Government offers investment opportunities too. Through various schemes, the Government needs a lot of money for its daily activities and executing development programmes. Public Provident Fund (PPF) is one such fund which is quite common and enjoys a great deal of trust by the public. You could start investing in PPF with a meagre Rs 500 per year, and the interest is paid annually. The entire life of the investment is 15 years, but the Government allows you to withdraw from the fund at various intervals. One of the critical features of investing in Government schemes is the steady rate of interest and lower risk.
In case you aren’t someone who doesn’t enjoy the privilege of time figuring out where to invest, you could outsource it to a mutual fund manager. This experienced person will collect tiny bundles of money from a large group of people and invest it in various places. If the stock market is soaring high, shares will be bought, if the Govt comes up with an exciting plan, money will be parked there. Instead of you spending time on following up on your investments, just buy a slice of share of the mutual fund. Despite the repeated disclaimer ‘Mutual Funds are subject to market risk’, it remains one of the best investment options available in India.
Step 3: Set a goal before you start investing
We have all grown up with our dreams. For some, it’s buying a luxury car or building an exotic mansion, or it could even be spending half a year in Europe. It is essential to set a goal before you plan on your investment. Approaching the world of investment with a specific set financial goal has many advantages. Firstly, it gives you a sense of resolve and cultivates financial discipline. Recalling the reason why you started investing in the first place would help you develop consistency. It would also aid you in much more informed decision making when it comes to finances. This is mandatory if you are someone who isn’t able to contain spending according to your whims and fancies.
Step 4: Don’t work hard, work smart (Think beyond salary)
We are taught that if we stick to one job, and work consistently there, we get raises, promotions and the corner office. But what we’re not told is that the more salaried income we make, the more we park our money with the Government. In India, a handsome percentage of the salary is eaten up by the Government. Various schemes to provide post-retirement security reduces the take-home salary of an employee in India. The job security for those who are working with the private sector isn’t that assuring. So, if you’ve got a carefully laid out investment plan, you could be less dependent on your salary.
More money doesn’t solve the problem. In fact, it compounds it. So don’t work to increase your salary. Instead, work hard in building your assets.
There are four things you can keep in mind- income, expenditure, assets and liabilities.
If your only income is your salary, most of it will be gone in your expenditure like taxes, food, rent, bills etc. And the more money you have, the more these expenses will increase.
Your liabilities include your debts, mortgage, car loans etc. which add to your expenses.
If you don’t have any assets, then most of your income will be gone in paying these off, and you will barely have any money to yourself.
An asset is something that has an economic value attached to it, but this includes—real estate, stocks, bonds, intellectual property etc. Your assets help in building your income because the income you earn through dividends, interest and royalties is all your money and doesn’t belong to the Government, or anyone else.
The goal here is that you make your asset portfolio so strong (and diverse), that you don’t have to work a day in your life to earn money (that your money keeps growing despite the tumultuous nature of financial markets.)
Step 5: Don’t let your emotions drive you
A little piece of advice is, always invest for an extended period. Money doesn’t grow on trees, but when invested for long periods, one definitely gets fruitful returns. But you need to understand that it’s not a straight slope upward. “Investments are subject to market risks,” as mentioned earlier. The value of equity and shares are going to vary through time. It often happens that when you see stock prices of one of your shares dipping, you start panicking and selling. And then later you realise that this was just a momentary dip and it starts to rise again. Your emotions can drive you to make rash decisions when it comes to money. One may get delighted looking at the price of some share going up and immediately start buying more, in hopes of making more money—only to ultimately lose it. Don’t make rash decisions. Take stock of what you have (pun intended) and make informed choices. Impulsive decisions always lead to poor choices and losses.
So there you have it, the beginners guide to finance—the art of becoming rich without inheriting any money or winning the lottery. Stay focused and consistent, and above all, keep learning. After all, knowledge is the highest form of wealth one could have.
Written by George Michael Fernandez and Sanjana Bharadwaj for MTTN
Edited by Sanjana Bharadwaj for MTTN