We think about financial planning every day, but seldom do we act. Trend of hoarding cash in our bank accounts to secure a safe future is a thing of the past. The returns from your bank accounts are far less than you will earn from investing money in bonds, stock market, SIPs and mutual funds among others.
Investing is key for those who want to become financially independent in the future. Investing in these options is not enough, you will have to monitor the progress of investments and stay invested in the long term. Here’s a short list of advice on how to invest, spend and save better in the prime of your life.
- Keep things simple, don’t fall for quick profits – According to legendary investor Warren Buffett, one must invest in places one knows best. He was quoted as saying, “If you don’t invest in things you know, you’re just gambling.” Elaborating on the same, in the 2014 letter to his shareholders, he had said, “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognise your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences.” To those lured by quick gains, this is what Buffett has to say: “When promised with quick profits, respond with a quick ‘no’.”
- The ‘rich and poor’ philosophy – A popular perception in financial planning is that we need to save a little after all the spending and invest that little saving. Robert Kiyosaki, American author of the book Rich Dad, Poor Dad, believes otherwise. “The philosophy of the rich and the poor is this: the rich invest their money and spend what is left. The poor spend their money and invest what is left,” he says.
- The frugality approach– When overcome with guilt at the end of the month for spending too much on that watch you loved or the new iPhone you absolutely had to pocket, you make idealistic promises to cut down spending on ‘frivolous’ things. Is it the right approach though? Can we realistically achieve equilibrium by taking drastic steps?
- Limit your borrowing – Credit cards can be alluring. Borrowing money that is unaffordable now somehow becomes affordable in a couple of months. Here’s what Warren Buffett says about the practice of borrowing: “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
- Make a plan – We spend a lot in a certain month, curb spending in the next to make up for it and end up in a vicious cycle of debt and little savings. Make a simple expenditure plan as well as an investment plan without delay. Don’t keep pushing it to the next month or believe that this month it’s going to be different.
- Invest for the long term – If you keep going in and out of the market, because of upheavals in the market, you may stand to lose. You must have a long-term view and invest in an asset class that thrives in a period of market upturn.
- SIPs take away the human bias – A systematic investment plan (SIP) is something experts harp on. It is believed to be a disciplined form of investment. SIP is the easiest way to create wealth. We are all aware of RDs – recurring deposits – in which a small amount that moves out of the bank account goes into a fixed deposit, month on month. It’s very similar to that but in equities.
- Reviewing your portfolio is as important as making one – A sound investment plan is nothing but matching your assets and liabilities. Assets comprise all your investments and liabilities. A successful plan is one which ensures that you have the required assets at the required time to meet a goal, and that’s why asset allocation is very important. Classifying goals into critical and discretionary helps one make a sharper plan. However, one must understand that making a financial plan is not enough. It is even more important to review it regularly and stick with the plan. The whole purpose of planning is to come off personal biases and invest rationally.
- Take expert advice – While we can try and do research on our own, but our busy schedule doesn’t allow us to do the same and we end up doing investments on word of mouth. There are financial advisors to fall back on and we should take their help as they invest their time in researching on your behalf.