Let’s Water the Money Plant!

money-tree-clipart-300x300There is always a mystery associated around the field of finance and especially investments. Is letting your money grow complicated? Is investment not a cup of coffee (or tea) even for the highly literate intellectuals? There certainly is some ambiguity or confusion around. Tax planning, insurance planning, estate planning, retirement planning – most people are away from these. KYC requirements, HUF rules, 80C and various regulations are left for the experts only. While all these prevail, we also have a strong urge to create wealth using our investments. We see many examples of people growing their wealth over a period. Let’s identify what all it takes to grow the money plant!

First of all, wealth is not created in spite of earning due to indiscipline in handling the income. There are a couple of simple rules. If you stick to them, your wealth is sure to grow. Just check this list of simple rules.

  1. Saving must be done from the first salary or income itself. Investment works on the compounding principle, so sooner the better! Warren Buffet wrote that he started investing as a teenager, and he felt he was late!
  2. Don’t put all your eggs in the same basket. Neither in the same asset class nor same sector. Please check if you are overweight on any investments like real estate or equity or FDs.
  3. Accept that no one can predict the future and have a view or forecast. So, don’t rely on opinions even based on studies. It’s not about incompetence; it is the simple fact that any ‘news’ is always ‘new’! So, don’t study too much to invest or take more risk than required.
  4. Understand that you must beat the inflation in your country to earn enough for your retirement. So, identify the asset classes that beat the inflation over a long term and then diversify within that asset class.
  5. Investing is not a race; you only need to cover the distance in average time, no need to reach first. Investing early with diversification is better than keep doing analysis and hunting for a multibaggar!
  6. It is easy to analyse in hindsight and create an interesting story around it. However, it is self-deception if you believe that someone can identify future multibaggar with surety. We humans blame ‘luck’ for wrong predictions and credit ‘self skills’ for correct predictions. Machiavelli wrote, “the great majority of mankind are satisfied with appearances, as though they were realities, and are often more influenced by the things that seem than by those that are.”
  7. Make sure that you invariably provide for enough insurance before you start spending on holidays etc. Divide your expenses into discretionary and non-discretionary and prioritise them.
  8. Remember to invest all the cash except for the emergency requirements. Keeping money in savings account or short term FDs is not investing.
  9. Growth and income are antonyms in the world of investing. Either you can target regular income from your investments or capital growth. Normally, growth requires patient investments without intermediate withdrawals.
  10. Finally, try not to borrow for a consumption asset like car. If you have to repay the loan as soon as possible. Taking a loan for an income-generating asset like education or second house to be let is a good idea.
  11. Also, see that you don’t borrow at a higher rate, when you can withdraw from an investment done at a lower rate.
  12. Trying to get insurance and invest using the same financial product is a bad idea. Don’t mix them up. While insuring, try to get the best cover and don’t wish that the money should come back. Insurance companies are not investment firms and they do not provide good returns.

In closing, it is YOUR money. Growing it is no rocket science. Just keep reading a bit and you understand the common errors to avoid. Know the investment before you sign the documents. Ask the questions to your financial advisor.

Happy Investing!

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