After I wrote my previous article on financial planning for the middle working class, many people have been contacting me seeking advice for their financial investment and security. Sadly, I’m neither a financial planner nor an investment advisor. I read books by Robert Kiyosaki, Benjamin Graham, etc and watch videos of Indian Youtubers like Dhruv Rathee, Sandeep Maheshwari and Pranjal Kamra.
So, this is a follow-up article in response to some of the questions you have asked me.
If you’re someone who has just started earning a salary or have been earning a salary for some time now and is dreaming of a secure financial plan for your future, here are three humble advices.
1. Invest your saving
Imagine you have a packet of watermelon seeds.
Do you want someone to guard your watermelon seeds with 24/7 security or plant them to grow into a watermelon farm? If you want someone to guard your money, keep all your money in your savings account in the bank. But if you want a watermelon farm, start investing. There are many options: SIPs & Mutual Funds, Stock Market, Post Office Schemes and Bank RDs.
What about investing in land?
It is a good investment if you’re not borrowing with interest from somewhere to buy the land.
Some people take personal loans from banks to invest in land. This is a huge gamble.
Suppose you take a loan of Rs 10 lakhs from the bank to buy a plot of land with an annual interest of Rs 12.5%. Your monthly EMI will be 22.5k for 5 years and you will end up paying Rs 13.5 lakhs to the bank in 5 years. Your total investment in 5 years at 22.5k per month is Rs 13.5 lakhs and you have a plot of land.
Now see some other alternatives.
Rs 22.5K at RD (7.5%) for five years will give you 16.4 lakhs
Rs 22.5K at SIP plan for five years will give you something between 17-18 lakhs or maybe more depending on the market situation.
Will you be able to sell your land you bought for Rs 10 lakhs at Rs 20 lakhs after five years? That’s a big gamble.
***If you still want to keep your money in your savings account, go to the bank and ask them to enable the ‘auto sweep’ option in your account. (Some bankers might not be happy that I’m revealing this) That way you will earn 6%-6.5% interest rate instead of the usual 2.5%.
2. Minimize your Liabilities
Imagine you have a plastic water tank (Let’s call it Sintex for convenience’s sake) at home. There is a big pipe filling the Sintex with water and 5 small pipes at the bottom taking water away from the Sintex. This way, the Sintex will never fill up with water. Many families run on this Model. The big pipe filling the tank with water is the monthly salary/income. The small pipes taking away water at the bottom represents food & rent, children’s education, bills, cars and indulgences.
This is an example of Assets vs Liabilities.
This is the first lesson to be understood in financial management.
An asset is something that puts money in your pocket. (Salary/Wages/Profits/Stocks/Bonds/Shares etc)
A liability is something that takes money away from your pocket
(Bills/Food/Clothing/Education/Cars/Indulgences)
The first step toward achieving financial freedom is to minimize your Liabilities and increase your Assets. Many of us are fooled into buying things that look like an asset but are a liability.
For Example: A Car bought with a Car Loan.
All my friends who have bought flashy cars with car loans have all told me that it was the biggest mistake of their life. Suppose you buy a Maruti Baleno Alpha (10 lakhs) with a down payment of Rs 2 lakhs and you plan to recover the loan in 5 years. Your monthly EMI will be around 17.5k. The total amount you will end up paying will be 10.5 lakhs plus the 2 lakh paid as a down payment. In five years, the resale value of your car will be around 5 lakhs. (Believe me. With E-cars and Hydrogen fuel on the corner, petrol and diesel vehicles’ resale value will drop faster than you can imagine). So in 5 years, you will have invested a total of 12.5 lakhs and you end with a five-year-old Maruti Baleno with a resale value of Rs 5 lakhs.
Here is a better option: Buy a two-wheeler or a five-year-old Maruti Alto for your conveyance and invest the Rs 17.5k every month in mutual funds/SIPs/RD. If you open an RD account with that Rs 17.5K per month, after five years you will have Rs 12.5 lakhs. The return will be higher in Mutual Funds SIP. Invest in a land with that money.
Always looks for ways to increase your assets and minimize your liabilities.
Identify and plug the leaks in your water tank and try to insert some more pipes pouring water into your tank.
3. Runaway from Scams
If you’re losing hair and someone were to offer you to buy a product that doubles your hair growth in one month or a vaccine that will double the height of your newborn baby within a month, will you buy the product? No, we won’t. Because we know that such products, even if they exist, are a scam.
Scams will never come to you looking like scams. They will often come like an answered prayer, as though God has opened a way for your financial woes. However, if someone you know comes to you and tells you that he has found a company where you can double any amount of your money in a short period, drop whatever you are doing, make a 180-degree turn and run away from that person as quickly as possible. All money doubling schemes are scams no matter how genuine they sound. Over the years, I have seen many families and individuals who have succumbed to such scams and were robbed of their hard-earned money, some even as high as Rs 20 lakhs. Money doubling schemes will always end up doubling your miseries, not your money. Also, stay away from mobile apps that claim to let you earn 1k-2k per day from home. If such things were true, many of us resign from our low-paying jobs.
Another area where we waste money is Online Mega Sales. This is not a scam but many people are tempted when online stores come up with Mega sales with 30%-40% discounts. So we borrow money from people and buy those things that are at discount. Stop buying stuff you don’t need with money you don’t have to impress people you don’t like.
Conclusion
We need to plan in life.
Remember – If you fail to plan, you are planning to fail. At the same time, let’s also be reminded that the most important thning inlife are not things. They are people. Don’t forget to invest in people too. In a long run, they pay the highest dividends, the things that money can’t buy. Fulfilment.