Personal Finance

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Once a person starts earning, there is some amount of financial knowledge which a person ought to have. During the first few months of earning, everyone has big list of things, which one buys for oneself, family and friends.... Gifting here and there... Partying here and there....

But starting to save and invest is also important once the other things are taken care of... And earlier the person starts on this journey, the better it is in the long run.

I will throw light on the following things one by one:

Emergency Fund
Life Insurance (Term Insurance)
Health Insurance
Investing - Fixed Income Instruments/ Stocks and Mutual Funds/ Real Estate/ Business/ Precious Metals/ Art
Funds for your various needs

Emergency Fund

This is the first fund which you will have to work on...

This is basically your savings to take care of your monthly expenses just in case you stop earning (Like during the Corona Pandemic) or job shifting or to take care of sudden unexpected expenses which crop up for any reason (Medical Expenses- God Forbid!)

The amount of this fund will be 3-6 times your monthly expenses (for u to calculate) and this would be the liquid money which one should set aside for any emergency.

This emergency fund can be kept in a savings account (earning 3.5%) or in a liquid fund/money market fund (3-4% average).

Life Insurance (Term Insurance)

If you are married and have dependents on you and you are sole bread-earner for the family then you need to buy a life insurance policy and pay annual premiums for the same.

Now, there are many products sold in the market in the name of life insurance but you should opt for term insurance only. Why I say this is because you should not mix investing with insurance. The other products will provide you insurance and also promise you a certain amount on maturity but the premium will be very high for the same. For investing there are other instruments with higher returns.

Here your objective is to safeguard your dependents and this is only for the untoward events in life.

So, it is better to choose a term insurance plan for which the premium will be low and the amount covered will be high. Your annual premium is just a security amount which you will be paying every year for insuring your dependents. And yes, this money is not coming back. The amount of cover which you should insure yourself depends upon your monthly expenses and also keeping in mind the inflation over the years

Health Insurance

With the rising costs of healthcare and they will mount further in the coming years, it is very necessary to insure your health interests. The health insurance plan can be an individual cover or a group cover according to your family structure. There is an option of cashless policy and another which you have to pay upfront and later on you can claim it from your insurance provider. Choosing the insurance provider and amount to be covered is beyond the scope of this article. However, if you are in your 20s/30s/40s, then keep in mind that usually these insurance claims are required when one is older (50s-60s) due to aging problems. But a health insurance is also important in sudden expected events in younger years which require medical attention (any accident or any lifestyle disorder). So, having a health insurance policy for yourself and dependents is important and a necessary thing

Both Health Insurance and Life Insurance Premiums have rebates while filing the Income Tax Return.

Investing

Why do you need to invest?

Well, you need to invest to counter the effect of Inflation (rising costs over time).

If you keep your money idle and not growing, then it will loose its value over time. For example, your Rs.10 today will have less buying power say after 5 years. But instead if you have parked these Rs.10 in any growing instrument or asset class, it will be growing over time beating inflation and having more value.

The rate of inflation varies according to the economy in the country but a figure of 4-6% (Can be lower or higher) should be kept in mind. So, this means that your idle money today will be loosing value at this rate per year. To counteract, this the money should be invested in some growth instrument which beats the inflation rate.

Also, with investing, the role of compounding effect in economics also come into play. Google the compounding principle and see the formula. A small example i can give is suppose you have invested Rs.10,000 for a period of five years at an annual rate of 7%. After one year, the amount becomes 10,700. So, for the second year, the growth rate of 7% is applied to "10,700" and not the principal "10,000". Get the picture... Now imagine this compounding effect over a period of 20-25 years... That's the game and that's why they say to start investing early in life.

The type of investment vehicle is a personal choice and should be chosen according to one's risk appetite and goals of investing.

There are various categories:-

Fixed income instruments/ Stocks & Mutual Funds/ Real Estate/ Business/ Precious Metals/ Art (The List is not Complete)

Fixed Income Instruments

As the name suggests, these investment vehicles guarantee a fixed amount on maturity. Examples of this are Fixed deposits (FDs) and Postal Saving Schemes. These are suitable for those goals where a guaranteed and fixed amount is assured. Since, they are low risk, so the return is also low. However, high risk and high return is not always true too. They assure a growth rate of 6-8% and the returns are slightly higher for Senior Citizens. With years and development of economy, the returns on these fixed income instruments is decreasing. In developed countries the rate is even lower. But the assurance of fixed income on maturity makes them a desirable investment vehicle for certain classes and certain goals.

Stocks (Equities/Shares) & Mutual Funds

When you buy a share (stock) of a company, you are buying a small partnership (tini-tiny) in the company depending on the amount of equity you hold. You become a partner in both the growth as well as the fall of the company. Certain companies deliver dividends also based on their profits for the time being you are holding the stock. Since, these are publicly listed companies, the shareholders also get to have a say in certain decisions by electronic or postal ballot. Although there are ups and downs in the stock market and its very volatile, but in the long run, history has shown that it has given high returns (15-25% average). I don't recommend trading but if you are buying a stock, be with it in the long run. When you see growth charts of companies over many years (5-20 yrs), many companies have shown good growth and even exponential growth sometimes. You also need to have good personal knowledge about the companies you invest in and the help of stock advisors is always there.

When you don't want to get into the particulars of the a company or companies and you can't keep yourself abreast with the hustle and bustle of stock market, but still wish to invest in it; You can take the help of mutual funds. A mutual fund is run by a dedicated fund manager (or managers) who invest on your behalf, your money into the stock market. You purchase the units of mutual funds depending on the amount you want to invest and that money is directed into the stocks depending upon the focus industry of the fund. One can also invest in mutual funds by means of systematic investment plans (S.I.P.). A SIP is an amount which will be deducted every month from your account and invested into the fund of your choice. Here also the effect of compounding comes into play and the investment is spread over time.

In both stocks as well as mutual funds, the money invested can be liquidated in 3-5 working days.

Real Estate

It is called as "real" estate for a reason. You can see and feel your asset. This is one of the oldest form of investment going on for ages and it still holds popularity. Buying for living and buying for investing is different. As far as growth is concerned, commercial properties have higher growth rate as compared to residential properties (generally speaking, there are exceptions). Also, the growth in buying a residential plot is higher than buying an apartment in a building. Keeping this technical stuff aside, buying any property is an asset which grows over time. The life cycle of growth in real estate is slow and is usually around 5-15 years. But there can be sudden spurts of growth due to increased demand and exponential returns can be obtained. For no other investment vehicle you will get a loan from a bank to purchase an asset. A residential property can be purchased with as low as 20% downpayment and finance for the rest which has to be settled with EMIs over a chosen period (5-30 years). After holding a property for certain years, you can move on into a bigger property. There are tax benefits on both - paying the home loan EMIs (first house only) as well as buying a larger property.

However, both buying a property and liquidating the investment is a slow process. But, its the investment vehicle of choice for many.

Business

This domain is both- the one with highest risk and the one with the highest returns.

In stocks, we said you invest in a company or business by buying a share/equity. Well, if you can start your own business or be a close associate (partner) with a businessman and invest your money and time in it, then sky is the limit. Many business are started everyday and most of them fail. Yes, most of them fail. But, the ones that succeed, they create a path for others to walk on. Their can be various ways by which this area can be entered. For example, if one has not much know how of the industry then one can choose the franchise pathway. Or one can play only the role of an investor and be behind the scenes. Business are based on one of the two things - a product or a service. The selling of any one of these or both is the way by which businesses make money. For example, buying a Television of a particular brand is a product and using a Hotel room for a stay is a service. The success of the business depends on the sales and sales is the most important thing in business although there are many factors involved. Customer satisfaction is also important which will go a long way in improving sales.

Precious Metals

Gold & Silver - These have shown slow but continuous growth over decades & decades and have almost never depreciated besides the daily ups & downs. They are sometimes known as the "Currency of the Gods". So, next time your spouse is asking for jewellery, you better buy her one, as you are buying an asset (U loose on making charges though!). Precious metals can also be bought in the form of exchange traded funds (ETFs), i.e., in paper format for investment purposes. Gold mutual funds and sovereign gold bonds are also there to buy gold in paper form.

Art

Many investors park there money in various art forms also like paintings, vintage items, historical artefacts, handicrafts etc. There are also art managers and experts which you can guide in this area.

So, this was my attempt to give you an idea about the world of personal finance. Taking care of the financial aspect of life is also important.

Funds for Various Needs

After you have the basics taken care of, you can create or set aside funds for specific purposes like - Retirment Corpus, Child's education, Child's marriage, New Vehicle, New House, Home Renovation etc. Investing is done with these goals in mind.

As the famous quote goes "Dont put all the eggs in one basket", you should also hold various investment vehicles (Diversified portfolio)

😉Statutory warning : The things mentioned in this article are my personal views and opinions. You should also do your own research before investing.
And yes, the role of a financial advisor, financial planner, stock advisor, chartered accountants and other financial experts is important while planning your investments.

Advice :- File all these documents in a your own personal finance file or save a copy on the Cloud. And its better if your partner is involved in this and she/he is aware of the things in the file. Also, the documents can be kept with your trusted financial advisor or planner or legal consultant.

Bonus Tip:-

Road to Financial Freedom :- Financial freedom is when you don't have to work any more to earn money. This is a point when your monthly expenses are taken care of by the returns from your assets (investments). This should be the ultimate goal of every person as after this, you wont be working for money, but you will be working and doing the activity because you love it... Not because you have to earn money to take care of daily expenses.

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