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Getting started to Save and Invest
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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
Contents
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
- Introduction to Indian Financial Markets
- Securities Market Segments
- Sukanya Samriddhi Account
- Employees Provident Fund (EPF)
- National Pension Scheme (NPS)
- Asset Allocation and Investment Strategy
- Investment Risk and its Measurement
- Risk Profiling
- Measuring Investment Returns
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