Getting started to Save and Invest

I generally start by asking a question: Why are we investing? What is its goal?

We have certain financial goals.

So we need to invest so as to reach those goals

Very true Vishy ji. We invest so that money is there for an emergency

Correct Srikanth.. Now that most of us in govt. or private jobs, we need to invest so as to keep some money for retirement

We will discuss about all these in our first presentation - Personal Finance

Giving priority to Savings

Broadly speaking - we have two terms - Savings and Investing

Let us take an example

I work of Infosys. My monthly take home salary is Rs. 75k

The routine way is that we spend for all our house hold needs, groceries etc

And with what ever left out money as bank balance, we will use that for investing.

Right?

Income - Expenses = Savings

This is the definition. Right?

Well, all of us know this already and that is how we are doing.

In fact, this is a very traditional approach

And let me tell you, this is no longer the right approach..

Rather, this is no longer an optimal approach.

Yeh Dil Mange More !! Right?

If you want to save for your future.. rather.. if you want to invest for your future, you need to make a lot of committments

We will have to rephrase the definition now

If I ask you to save money by cutting expenses.. you will not do

You always give priority to expenses because we generally have surplus funds all the time

Let me rephrase the definition

Income - Savings = Expenses

After my salary comes, I will commit and put some money aside for savings

With the left over money, i will try to use for expenses

I can eat tiffin .. .say 2 idlis for Rs 10, Rs 50 or Rs 100

As long as we have surplus funds, we give higher priority to expenses over savings

So commit to a number when it comes to savings.

Ideally, saving 20% of salary is not a difficult thing

The first commitment!

When my salary of Rs 75k comes, I have to commit my self to this 20%

75k x 20 / 100 = 15k

First keep the 15k aside as savings money

With what ever is remaining money, use it for your expenses

Here 20% is a random number I have taken

U take what is comfortable to you

If husband and wife are working, perhaps they can save as much as 50% !? May be

So, what I am telling is.. start with a commitment to save

Take a percentage number that is comfortable to you.. say 20%

Put these numbers in Excel or somewhere in writing

Writing is very important.. or else you tend to forget or ignore

Once u write with a pen and paper .. or Excel.. it acts as a reminder for you to stick to that

The Next Step

2nd month .. aim for a little higher

say 25% as saving

I know this will be difficult thing

But this is the actual place where u really start thinking seriously

This is the actual point where u really think of looking for bargains

U start thinking of alternatives or areas where u can saving

Earlier, 20% is a comfortable number.. you will not think much.

Actually you would hardly do anything different

But 2nd month, when u put a target of 25% savings, u do serious changes

u look for discount offers, bargain deals, postpone unwanted expenses etc

This is the starting step of actually saving

Do this 25% savings for few months till u get comfortable with

Start from next few months, your way of thinking will change

U automatically will be able to set priorities to expenses

U automatically will be more careful in spending

I am not saying that u have to compromise on the quality of life

Small little changes will take you a long way into savings

The idea of all this exercise is to Spend Less.. Save More

Only when u save money, u can invest money.

In fact, you become so conscious that you become a good financial planner for your house

U organize your financial things in a proper order

If the mobile phone bill comes excess, you question the company as to why they over charged you

If u do not do these things, u are like traveling in a boat with a leak to it

Water will come in and u will sink sooner or later

Find out your own areas of optimization of your finances

You are the best person to decide what is essential spending, what is optional spending

Agreed?

Possible?

Can you do it?

Will you do it?

The Will part is your commitment.. your determination

i save more than 50 % of my earning

Wow. Great !.. So your next number is 55% !!

20 to 40% Savings possible as I do not have any loan or big money commitment as on date

Wonderful! Fix a number and try to exceed that number.. and then 5% more than the fixed number next month

Now lets get to the next step

Ready?

The Expense List !

In most cases, we already know our future expenses

For example, we know where and how much we have to spend tomorrow

We plan our weekend.. we know where we will be spending

In two months time, schools open and I will admit my kids in school... so books, fees...

Come November, I wish to go on a vacation.. Kerala, Ooty.. or Thailand!

Write all your planned expenses

Write all possible expenses that come to you mind

Even silly expenses too.. for example.. I want to buy shoes next month

Put a rough number to the expenses

Set a priority level to that expenses

Priority 1 is essential.. u cannot skip them.. such as school fees

Priority 5 expenses can be postponed to next month.. but not for too long.. say shoes

Priority 9 is least important.. you can postpone them for next month or next year.. it will not make material changes to your comfort

So, on a scale of 1 to 9, set priorities to your expenses

Excel is a wonderful tool to do all this.

U can put color shared according to the priorities

We have something called Color Formatting in Excel

U can apply Filters .. Conditional filters

Right?

I hope you are all aware of the various tools in Excel

Now, Priority 1 are essentials

You cannot skip them

You cannot postpone them

You have to attend them

So, those are the things we have to attend on priority

Now we have channel our savings for these first

A goal that is very close in time has to be added the most urgently

So the savings money should have to be routed to that

Visualize the savings like bricks put one over the other

like a stack of books one over the other

The brick at the bottom (the one which you have put the first) is the one that will be used for the Priority 1 expenses

So u have to mentally write on it.. this brick is for kids school savings

So the ladder.. the stack of bricks or books... which ever u feel it is

First and earliest savings made will be used for Priority 1 expenses

Last and the most top bricks will be used for Priority 9 or least priority expenses

Got it?

Bricks are given names

The concept behind this is: These bricks are your various savings instruments

Banks call them Deposits

Post offices call them NSC Certificates or Savings certificates

Finance Companies would call them Debentures

Mutual Funds call them Funds or Schemes

Stock brokers call them Demat

The brick is your saving to meet an expense

The more bricks you have, the more expenses you can reach out comfortably

Save Before You Spend

If brick is not there, you cannot spend.. you should not spend

Allocating bricks...

Once u allocate a brick to an expense, do not give or allocate to a lower priority one.. but feel free to give it to a higher priority one

Let me give you an example

I have a brick.. I initially allocated it to Priority 5

Now i should not or will not allow to use that brick for Priority 9 because 9 is not a higher priority

But if there is Priority 1 expense, i would allocate it for that expense

For example, I need to go to hospital for a small minor treatment.

This is a medical thing.. because it is health related, it is Priority 1

Remember Health is very important.. nothing is more important than health

Never neglect it..

Because the cost of fixing it later will be far expensive that you have to use all the bricks you have if u delay it

Personal Finance is the first step towards investing

Be prepared for tomorrows challenges

I agree with our friends.. our jobs are very insecure

IT, Pharma , Onsite ,,

But be prepared for anything.. future is totally uncertain

One question to you all.. think from your own perspective..

I am working fine now.. I am getting salary

What are the financial consequences to me if my company removes me from job tomorrow?

How prepared am I towards that?

Those who are doing business.. you need to think this way: What will happen if doing becomes all of a sudden impossible from tomorrow?

So we need to put some savings to meet for immediate financial needs

Debt and Equities.. An Intro

Investing is of two types broadly speaking

Those bricks that are to be safe at all times

These instruments need not grow quick but their safety is more important

These instruments we call Debt securities.

And as our friend is pointing out.. for long term, we want our brick to automatically get bigger and bigger over a period of time

We call these instruments Equities

Take Debt securities like diamonds.. They fall down, they wont break

But Equities are like glass.. they fall down, they break

But if this glass is made stronger and stronger, it becomes harder and harder

The strength to the glass (in this context) comes over a period of time

So, in regard to instruments for investing, we have Debt and Equity

Both Debt and Equity are both important

No matter how rich you are, how prepared you are, never ignore the balance tat is necessary between Debt - Equity

Related Lessons

Getting started to Save and Invest

Contents

Giving priority to Savings

The first commitment!

The Next Step

The Expense List !

Bricks are given names

Allocating bricks...

Be prepared for tomorrows challenges

Debt and Equities.. An Intro

Related Lessons

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