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Take Control of Your Financial Future: The Importance of Investing in Building Wealth
In this article, we will learn about the benefits and the importance of investing for a comfortable future. If you are still following the series, I sincerely appreciate your efforts for wanting to bring your financial life in order.
For those who have directly landed on this page, I would like to mention that this article is among a series of articles designed to improve your finances.
You could visit the first article here and get a better overview of the series.
Finance Education Series
Now comes the fun stuff.
In the first article, I asked you to build a layout of the wealth you require. ( I hope you did that.)
Now to touch that kind of wealth with your current earnings, you need some support. You can achieve this by creating new income sources or putting the already earned income to work.
Making use of the already-earned money is the easier of the two options.
While you are focussed on your tasks and do things by your routine, the money earned gets into work and accumulates for you.
Slowly, provided enough time for the money to compound, you can earn an absurd amount.
Making your money work for you requires investing. Your money should work hard for you because you work hard for it.
The banks are not straining to pay you to keep your money in their safe. You are responsible for making your money work for you. You can control how you manage your financial security by investing. It enables you to increase your wealth while creating a backup income source if you need one before retiring.
Although the government offers income through Pension Funds, it is insufficient to cover retirement expenses, so you generally don’t want a plan that depends on it.
Moreover, an extended working life might result from either not investing or investing improperly. When you take investing seriously, the income you receive from your investments can guarantee your future financial security.
Benefits of Investing
1. Greater Return On Investment:
When money is invested in an asset, a trade-off occurs because the investor forgoes the utility of using the money for his investment now in exchange for a higher utility later.
- One way that stock investments can generate returns is through dividends, and the other is through capital gains.
- Bond investments can provide recurring payouts or coupons that are provided at predefined periods, which can be advantageous to the investor.
- Rental income and capital gains are additional advantages of real estate investing for the investor.
2. Early Retirement
The majority of people invest to fund their retirement. It is challenging to maintain one’s lifestyle after retirement when one does not have a job because the majority of individuals rely on their pay income to meet their necessities.
This means that everyone must invest some of their income while they are still employed to have a nest egg for their later years. While the government and businesses once offered defined benefit pension plans to employees, defined contribution plans are now the norm.
Many young individuals desire to retire early, therefore to achieve their objectives, they must invest a bigger percentage of their income. Among millennials, the “FIRE” movement has grown significantly. The phrase “Financial Independence, Retire Early (FIRE)” is a common one these days.
Saving a significant part of the money at a young age—up to 70% of your income—can enable one to retire around age 40–45 rather than 60–65. The FIRE movement encourages leading a modest lifestyle while investing and after retiring early.
3. Beat Inflation
To beat inflation, investing is also essential. Your money will lose purchasing power if you don’t buy assets with it and instead keep it in a checking or savings account since inflation will erode its worth.
As costs for healthcare and education are rising considerably more quickly than reported inflation, even if reported inflation is currently low, actual inflation is high. If you don’t invest, your money will eventually lose value because Indian banks don’t even pay 5 % on savings deposits.
Even this 5% return might not last very long, given that other foreign central banks have slashed rates to almost 0% or even lower. It implies that if inflation is considered, you can experience a day when your bank accounts yield 0% or even negative returns.
Start investing in diverse assets that can outperform inflation to protect yourself against such a scenario.
4. Achieve Financial Goals
The most important strategy to reach one’s financial objectives is investing. There are new financial needs that arise as a person matures through life.
Typically, it begins with a home purchase. A sizable down payment is necessary even if one borrows money to pay for a home. An individual can accumulate the corpus needed for the down payment by investing across many assets.
The college education of children might be another crucial investment objective. Given the high costs of college these days, parents can begin saving for their children’s college costs even when they are still very young. In addition to these financial objectives, retirement is a constant financial objective for people throughout their working life.
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Meet Mr. CI
To understand the importance of investing, you have to know about a good friend of mine: Mr. CI.
Mr. CI, or Mr. Compound Interest, is a wonderful person who has the habit of multiplying the effect of anything.
Whether bad or good, once you pass something to Mr. CI, you will receive it back a thousand times. No doubt Einstein said him to be the Eighth wonder of the world.
Say you are 20 and plan to invest 10,000 rupees every month for ten years.
You would have invested 12 lacs rupees.
But let us assume that your investment was growing at 9% annually. You would have earned whopping 7.45 lacs rupees and made a corpus of 19.45 lacs.
But that is not the impressive part. Assume you want to continue to invest for more than ten years.
After 20 years, your investment would be 24 lacs rupees, but can you guess the final corpus value?
It would be 67 lacs. That is almost thrice what you invested.
Want to learn more about the power of compounding? Check out the article below.
If you understood all of this, let’s now work toward an understanding of the instruments that are in front of us.
There are primarily 3-categories:
1) Real Estate
2) Debt
3) Equity
1) Real Estate: This category is one of the most loved categories in my country. You may or may not invest in other avenues, but having your own home or having houses providing you rent is a sense of accomplishment. And it has done pretty well over the years, and with rising demand, it doesn’t show any sign of slowing down.
As this category varies from place to place and each country has its laws, I cannot provide a general layout for this particular category. You can learn more about it using Google and the local directory.
2) Debt: Debt, in simple terms, is a loan offer where you provide someone with money, and the opposite party promises to pay you back with some interest. Many entities opt for this route, even the government of many countries, which borrows money from their people and use it to build important things like roads, schools, and hospitals. The usual earning with a debt instrument could be around 6-8% in India.
3) Equity: The best investment there could be. Equities buy you ownership in companies. When the companies perform well, their stock prices rise, and you, as an owner, get rewarded. You can decide to sell your stocks or hold them for more profits. When companies make good profits in a year, they hand out dividends to their shareholders as a bonus. The usual earning with a debt instrument could be around 11-13% in India.
How To Build Your Portfolio
When you start to build a portfolio for yourself, you have to take care of two things.
- Short Term Expenses
- Long Term Expenses
Your needs will primarily govern the portfolio and how you allocate your money.
An ideal allocation of funds that is simple to follow is the 70:30 allocation for Equities and Debt.
Equities are for long-term goals, whereas debt is for short-term requirements. You can even reduce your debt a little bit to allocate gold. But that is a personal choice.
Equities are a must for the portfolio as it provides greater chances of wealth accumulation over long years.
I asked you to transfer the amount meant for investing into the investment account in one of our article.
Take that money and divide it into two ratios. I want to mention that these ratios are not permanent. You can vary it as per your needs, but it at least gets you going.
You can put 70% into your equities preferences and 30% into debt products.
I know I have not told you where to put the money and how to buy the product, and we’ll come to it in a short while.
Investing Strategies
First, understand the theme of your investing strategy.
The equities you bought are for big purchases such as houses or cars or, maybe one day, your private jet or even your retirement fund.
All it needs is time to compound and grow.
On the other hand, the amount invested in debt is to serve your near-term goals. Maybe you would want to renovate your house or vacation with your family. Generally speaking, you can use this fund to pay for any short expenses required within 5 years.
You can even start to build emergency funds into debt funds once you have good money in Fixed Deposit.
There is another reason why money for near-future expenses should not go into equities.
The equity market is volatile, and for it to show any result, you have to provide enough time.
When you put your vacation or renovation money in equity, and it falls, you cannot do what you intended your money to do. It does not make sense to put off living just for more money.
So a 70-30 ratio is a simple formula that many people can follow.
Once you get the hang of regular investing, you can sharpen your investment skills and plan better and more effectively.
Finding The Right Amount To Invest
Go to any SIP calculator, and experiment with the values. Enter the monthly investment values ( the amount meant for equity investment), the expected rate of return, and the time horizon. Check whether the amount matches the inflation adjusted requirements you calculated in the first article. If not, vary the investment amount or the time horizon.
When entering the rate of return, do not enter high expectations, such as a 15% annual growth rate. These kinds of figures are hard to attain. A decent 10% return would be a good start.
One thing to note is if your period is the maximum you want to invest.
Say you plan to buy a house for 3Cr ( after inflation) after 15 years, and that is non-negotiable. The current investment horizon and the expected return are not giving you the expected figure. Try to change the invested amount over the years rather than the rate of return.
You cannot control what the market offers, but you can control how much to invest.
If that means having lower expenses, do that. Moreover, if it means building a new income source, work on that.
If the market returns are better than expected, it’s a bonus. At least without it, you will get what you aimed for, if not less.
How To Invest?
You can choose two methods to invest your money, either by becoming an active investor or a passive investor. Choosing between the two is crucial, as it identifies your mindset, and all your future steps rely on this.
Who are these people?
Active Investors
This person actively chooses which stocks or debt to buy from the stock market. He reads about the companies, checks their progress, and adjusts accordingly.
Have you heard about the people on the news who tell how they picked a multi-bagger who made their wealth 10x?
These are the kind of people who are active investors. They research a company, invest their money, and out of 10, they make enormous money, on say, 1 or 2.
But these are professional players, and they play for thousands of crores. Not everybody wants that kind of money, and not everyone can work as hard as them. They follow the movement of their investment and make decisions. But, you only want to have enough funds for retirement and enjoy your regular life.
It is also possible.
The best way to pick up good stocks is to buy those companies which are niche for you. You may be inclined to a particular industry, and it might be your competitive edge to find lucrative stocks earlier than others. You need not pick what the crowd chooses. Your knowledge, common sense, and patience will work just fine.
You can check up on stock progress after every 6-8 months. When you pick well-managed companies, you can remain assured that the company will perform well in the long run.
Passive Investors
If you are this person, you don’t want to invest time in such activities, or maybe you feel it’s not your cup of tea. Then we have a solution for that as well.
You can do what is suitable for the maximum population.
Mutual Funds.
What are mutual funds?
Mutual funds are a product offered by big companies where they do the work for you and invest in companies they feel will work better. They are well-educated individuals whose job is to do such stuff and make money for you and them.
You can find mutual funds of all types, such as equity mutual funds, debt mutual funds, or even gold mutual funds. You can choose the right mutual fund as per your requirement and continue investing money in it.
Mutual funds are the best option as you pass on the hassle of managing your money to experts, and they can help you build wealth over a lifetime for your needs.
From here on, I will proceed with the Active investing strategy, but you can learn about the passive investing methodology as well.
Active investing requires effort as compared to passive investing. But the results are far more significant. You need to decide what kind of the two options suits you best.
Active Investing Strategies
Active investing is simple if you have common sense and time to devote to your portfolio.
To pick a stock, you can look at the companies around you, such as Reliance and Nestle, and whether it makes sense to buy them. Now it is even possible for Indians to go and buy US Stocks for diversification purposes but more on that later. You can even purchase debt instruments such as t-bills and government securities and earn interest income.
You can distribute your funds by choosing suitable stocks and debt instruments like various government bonds according to the ratio you come up with.
For debt instruments, you can buy various t-bills and government bonds that pay interest. The interest is paid in your bank account directly, and you can re-invest it unless you use it for any purpose.
This method also improves your cash flow along the journey.
Now I will tell you how you can pick the stocks for yourself and buy them for yourself.
Why Invest In Indian Stock Market?
Indian Stock Market is an emerging market and one of the best places to invest your money right now. It is one of the fastest nations in developing countries. The nation is creating more and more companies servicing other countries around the world. The vast population of the nation serves as great support for the rising job opportunities in the private sector.
The pro-corporate rules are promoting many entrepreneurs to set up their shops in India to contribute to the development of the nation. The unicorns are getting created at an immense pace which is creating many technological advancements and setting up a new horizon for themselves.
With the ease of Foreign Direct Investment, foreign entities are increasingly investing money in the Indian market due to its potential rewards.
Since its inception, the market has provided a steady return of 13-15% to its investors. This kind of return is enough for you to make a fortune for yourself.
There are established companies such as Reliance, ITC, and Tatas that are in the business of making world-class products and in turn making money for their investors. They have created millions of rupees for their investors.
They are among the few bluechip stocks that consistently perform and generate high returns.
You wouldn’t want to miss the journey, for sure.
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How To Invest In Indian Stock Market?
You can invest in the Indian Stock Market by first opening a Demat account. Demat Accounts allows you to buy and sell the desired shares. Many online brokers offer these services, but the best in the markets is:
Zerodha.
These discount brokers allow you to have your desired shares at minimal expense when compared to other traditional brokers who levy huge charges for such kinds of transactions.
To begin the sign-up process, you start by entering your number on the required destination.
Make sure that your mobile number is linked with AADHAR for easy verification. Also, do apply for your PAN card if you do not already have it, as it will prevent you from having any blockades in your application process.
The application process is fairly simple and easy. Usually, you will find a detailed step-by-step process, but those are some basic steps, and you will find them online easily.
There can not be any value addition from my end to the KYC process thus I have decided to leave it.
You can visit the FAQs section of Zerodha for clear guidelines as they get updated as per government norms.
Usually, discount brokers charge somewhere between 300-500 rupees for opening a Demat Account.
After the successful opening of accounts, you can easily buy and sell those shares as per your will. Just add money and buy the stocks and when you sell them, just click the sell command.
Why Zerodha?
Zerodha has been in the market for quite a time. But ever since the pandemic pushed people to focus on personal finances, its popularity has been rising ever since.
But why is Zerodha the number one choice for many of the Indians including me?
The first point is the user interface of the platform. Both website and mobile UIs are so well designed with minimal requirements. All the things you require are arranged in such a pleasing manner that you can navigate along the website without constantly looking in the FAQ section.
Then comes the other products that Zerodha offers to its customers. It not only lets you trade in equity and Futures but also lets you buy bonds and mutual funds via its platform Coin.
Then comes the products for day traders, they also get well-designed and high-performance applications such as Streak and Sensibul to gain maximum insights to make a trade.
The cherry on the top is the education platform Varsity. Zerodha does not only want to make a business out of you but also wants to educate you in making a proper analysis of the stock you choose and invest your hard-earned money.
All such products will rarely let you think about any other firm when you can get everything under one umbrella.
After getting excited about taking your first step toward personal finance, I am sure maximum of you might be thinking. What if the brokers shut their shops? What happens to those shares?
No need to worry. To solve this crisis, there is a mechanism, where the stocks are stored in a separate place.
What happens is when you create an account with any registered stock broker, they create a separate holding account in name of you whether in CDSL or NSDL.
Whenever you buy your shares, these shares in electronic form are stored in them and kept safe. So even if your stock broker goes bankrupt, your shares are safe in those vaults.
Before stepping into the ring of buying and selling shares, I would recommend you to read the below-mentioned masterpieces on the topic of personal finance. These books will help you make an informed decision about your finances and have a secured future.
Conclusion
Investing is a simple activity, but we tend to make it complex. After all, humans are driven by emotions. When greed and fear kick in, you tend to make unusual choices, and this leads to terrible losses.
But many have built wealth in the same arena where others have lost. It all depends on your planning, understanding of the company you buy, and how you manage your money.
Before starting your journey, try to read books on Investing like the one mentioned above. It will increase the odds of you becoming successful.
Finance Education Series
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