Top 10 Hacks to Safeguard Your Money – # 1

Confession Time: The last post on Antifragility did not get responses from readers which I expected it to get. To be more specific, the number of comments which the post got was ZERO. 🙁

Probably it was because the 10 Principles which I borrowed from Nassim Taleb’s amazing book Antifragilewere so simple, that readers took them for being a list of common-sense based rants and hence…not important enough. But I feel that it would be wrong to leave those principles as ‘obvious-common-sense-rants’ and forget them.

We need to understand that just because something is simple, does not mean that it is not important. Just like breathing. Its simple. You breathe in and you breathe out. But its important. If you don’t breathe, you die.

Just to ensure that readers understand the importance of those principles, I have decided to do a series of short posts, which will tell how to implement the simple but important principles in ones’ financial life.

So here it is…

Principle 1:

Stick to Simple Rules

  • Do not take loans if possible. If need be, take it only for buying money generating assets and not liabilities.
  • If you love your family, get yourself insured. It’s a small price you pay for their well being. And for heaven’s sake, buy Term Insurance Plans and not endowment, money-backs, etc.
  • Keep Insurance and Investments as 2 separate things.
  • Get health insurance for you and your family. Unforeseen health costs can wreck havoc in one’s life.
  • If you are not comfortable with ups and downs of stocks, do not be in stock markets. Just because people around you are making money in stock markets does not mean that you also need to make money from stock markets.
  • If you want to benefit from stock markets, but do not have the time to put in the required efforts, then please stick with investing in well diversified mutual funds. No need to buy individual stocks.
  • If you want to buy individual stocks, stick with companies which operate in easy-to-understand business, have more-or-less predictable earnings atleast for next decade or so, are debt free (or have manageable levels of debts), generate good amounts of cash, are able to invest money at increasing rate of returns OR honestly return cash to shareholders by means of decent dividends. And most importantly are run by trustworthy & capable management.


Simple Money Rules

Quick Note: I first intended to this Top 10 list in a single post. But then decided that breaking them into separate posts, would allow me to concentrate on each one of them a little more.

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If You Are Not Super Rich & If This is What You Think About Investing, Then You Might Be Wrong

Just read the title of the post again.

Give yourself a minute and answer this question – What Do You Invest For?

Don’t read any further till you come up with atleast one specific answer for this question.

If you have an answer, then read further

. . . . . . 

Many people think that aim of investing is to beat the markets.

It might not look wrong at first and may not be wrong for a few people*. But for most of us, investment is about much more than just beating the markets.
Wrong Investing
Is it Wrong to think that Only Aim of Investing is to Beat the Markets?
We invest (& you may call it saving if you want…though there is a big difference between saving and investing) for very few real reasons.

And one of those few reasons is to get the required sum of money whenyou need it.

The key words here are – Required Sum & When

I will give you an example for better understanding of this simple yet powerful statement.

Suppose you and your wife want to buy a car worth Rs 6 Lacs in One Year’s time. Now you know that you cannot pay the entire amount yourself and hence decide to opt for a car loan next year. And for that, you need to put in 20% as your contribution and rest would be funded by the bank.

Now 20% of Rs 6 Lacs is Rs 1,20,000 – amount you need to put in while buying the car.

Now you have 12 months to accumulate this money.

There are few options in front of you.

First is to save Rs 10,000 every month in a recurring deposit. After one year, you will have a little more than Rs 1.2 Lacs which you can then use to make a down payment for the car. This is plain and simple and without any risk.

Now suppose you decide that instead of following the first approach, you will put some money in rising stock market, in anticipation that your investment will grow larger in an year’s time. Since markets are rising, it is possible that you might hit some really good stocks and multibaggers which are able to make much more than the required Rs 1.2 lacs.

And who knows…. you might end up making the full 6 lacs in stocks!! 🙂

It is tough, but not impossible.

But when you put your money in stocks, there are 2 possibilities:

1) Markets go up and the value of your investment goes up.

2) Markets go down, and so does the value of your investment.

Will you then take this approach of putting money in stocks instead of safer instruments like Recurring Deposits?

It is risky. It can help you accumulate more than Rs 1.2 Lacs (may be 3 or even 6 lacs). But it is entirely possible that you are unlucky and when you really need those 1.2 Lacs, markets take a dip and your investments go down to 60 or 80,000. And that is less than what you need to reach your objective of buying a car.

End result?

You delay your purchase. Borrow more. Etc.

This effectively means that on the parameter of ‘Investment is an activity which provides required sum of money when you need it’, it is not able provide the required sum when needed with surety. It might provide more or it might provide less. But we cannot be sure of it.

You might say that such a case may only be applicable when one is investing for short term instead of saving. And you are right. One should save for short term and invest for long term. And savings, just like Investments should provide the required sum of money when required.

The statement – ‘Investment is an activity which provides required sum of money when we need it’ may not be the only correct definition of investment. But I feel it is a very important one. If we are not able to get the money when we really want, then what is the point of saving or investing?

We don’t want to live poor and die rich. Isn’t it?

What are your thoughts on this?

* The reference to few people (in first part of the post) is made to the class of rich people. They can have their own definition of investing. And that is because whatever sum of money they need for whatever, today or tomorrow, has already been earned by them. 🙂

Answer to the BIG question – “Why Am I Not Getting Richer?”

Didn’t you always have this question? 

That even after earning so much, why are you are not getting any richer?

I guess you must have felt like this before. In a post I did some time back, a person earning more than Rs 1 lac every month was barely able to make his ends meet; but that is before he took matters in his own hands and retired at a young age of 37.

What does it mean?

This simply means that there is something fundamentally wrong about the way we manage our incomes and more importantly, expenditures. But all is not lost. If you are ready to take care of some really simple but critical factors while managing your finances, then chances of you getting richer are bound to rise.

So here are the 5 less-discussed but really important ways to help you become rich.

Reinvest your profits
I have seen people making the mistake of not reinvesting their profits many times (to be precise, 19 times out of 20). Don’t be tempted to spend your profits. If you reinvest profits from your investments, then you would be helping yourself in the long run as you would be contributing to the magic of compounding. And don’t worry if the profit is small. In the long run, compounding takes care of converting small amounts into very large ones.

Control small expenses
Be obsessive over controlling small but wasteful expenditures. For example, just because one of your colleagues has got himself a new phone, you decide to buy a newer one to satisfy your ego. Agreed that such expenditures can give you pleasure & satisfaction. But these would be short lived. And such useless expenditures also dent the process of long term wealth creation. Exercising vigilance over small expenses can help you divert funds from going towards unnecessary expenditures towards better investment (profit) opportunities.

Limit What You Borrow
It is simple common sense. Living on credit card and loans won’t make you rich. Period. It is only when you are debt-free that you can think of saving and investing to become rich. If you are not debt free, then most of your time would be devoted in servicing the EMIs and Credit Card Bills. Think about it.

Assess The Risk
Just because a family member or a good friend introduced you to something which looks-too-profitable-to-be-true does not mean that you should blindly do what you are being told. Asking ‘and then what’ can help you see all possible consequences and risks involved when making the final decision.

Be Willing To Be Different
Just because it did not work for somebody else does not mean it won’t work for you. But more importantly and similarly…just because it worked for somebody else does not mean that it would also work for you. Remember this and assess the risk provided by every opportunity. It’s always possible that life is offering you something unique to benefit from; and which was never offered to anybody else. So be ready and be capable of recognising such opportunities.
Warren Buffett Richest Man
To be rich (& not poor) is glorious and glamorous | 🙂
Note – Most of these 5 points/ways are based on Warren Buffett’s philosophy. Hence the picture above.

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Mailbag: How do I make an Emergency Fund?

A lady reader (Aarti) asked a genuine question in the newly created Contact section of Stable Investor. 

“I don’t understand stock markets, but wait eagerly to read other articles on your website. 
Everywhere on your site, you advocate that one should make an Emergency Fund. As a novice, how should I start making this emergency fund?
I feel its very tough for me to save money. And every month end, I am almost broke. Please help.”

In this post, I would try to help the lady create an Emergency Fund in 5 easy steps.



Emergency Fund, as the name suggests is there to handle emergencies. A job loss, illness, accidents, etc. An emergency fund should have sufficient funds to cover your expenses in case you loose your job, meet with an accident or have some unplanned expenditures? 

Emergency Funds
Remember God in good times and Emergency Funds in bad times

You can take following approach to create your own emergency fund –
 
Step 1: Calculate your total monthly expenses
This is the first step and you should not get this one wrong. When calculating expenses, it is necessary to calculate your family’s expenses and not just your own. This should include everything from expenditure related to food, rent, loan repayments (EMIs), transportation (fuel) costs, monthly insurance premiums, monthly investments (SIPs in mutual funds), medicines, telephone bills, electricity & water bills to more discrete expenditures like eating outs, gifts, festivals etc.
 
Step 2: Decide how much you would like to save
This totally depends on your level of comfort. There are different opinions about how much money you should put in an emergency fund: 3 months, 6 months or 12 months worth of expenditures. But don’t worry about others. Its your emergency fund and only opinion which matters is yours. Ask yourself how much you would need to feel secure, and make that your target for an emergency fund.
 
Step 3: Open an account
Once you have decided how much you need to put in your emergency fund, it is time to decide where to keep your money. One major requirement of emergency funds is liquidity. This means that you cannot park your money in mutual funds, stock markets, gold or other illiquid assets. The best option would be to open a Savings Account. You should open an account exclusively for this emergency fund. Or otherwise, you would be tempted to dig into your emergency fund account for non-emergency requirements. Though saving accounts don’t offer much as interest, it is important to understand that what they do offer is ‘liquidity’. Some banks offer close to 6-7% on Savings Account, which is quite decent considering the liquidity these savings account offers.
 
Step 4: Determine how much you can save regularly
Emergency funds aren’t built in a day. It takes time and regular savings on your part. Analyze your finances and determine how much you can afford to put towards your emergency fund every month. Don’t worry if you start small. Even a small amount will do as when you start saving, you realize the importance of such a fund and the risk of not having such a fund.
 
Step 5: Automate it
If possible, make arrangements to allow automatic transfer of funds to this emergency account. This can be done on a pre-selected date every month. This is advisable as it brings discipline in saving and also prevents you from making any rash expenditure as you would always have the thought of automatic-emergency-fund transfer at the back of your mind. 🙂 

And it is my personal experience that if you don’t have to think about it, savings are much easier.
 
5 steps to create emergency fund

Dead Monk’s Advice: Don’t risk your emergency fund by going after higher returns.

Many of your ‘well-wishers’ and so called financial experts will tell you that you can easily earn more than 7% if you are ready to invest in MFs, stocks etc. But beware. Do not listen to them. 

Why?

Read the following scenario…
 
A little common sense would tell you that one should not take risks with emergency funds. Suppose you invest you emergency fund in stock markets. During recession, you lose your job. It is common knowledge that during recession (when you lose your job), the markets would be down, i.e. your investment would be quoting at prices lower than your purchase price. Hence, you would have to book loses in case you want to use your emergency fund. This would not have happened if you had stuck to safer savings bank account.

As of now, you might feel that you are not in some kind of emergency situation…
 
dont wait start now
 
Suppose you earn Rs 50,000 every month. Your monthly expenditures are Rs 25,000. You want to build an Emergency Fund of 6 months, i.e. (6 Months x Rs 25,000 = Rs 1,50,000). Assuming, you are able to put away Rs 10,000 every month, it would take you 15 months to create an adequate emergency fund.
 
emergency fund time required
Timeline for creating an Emergency Fund – (Click To Enlarge)
So start now as 15 months is a long time and you would not like to face an emergency without having a fund to handle it, isn’t it?

Why they don’t discuss these 2 things on Indian Business Channels?

Have you ever watched channels like CNBC-TV18, NDTV Profit and Zee Business? Do you remember what they discuss on these channels? As far as we can remember, they discuss about investment ideas, target prices, breaking news, directional calls, trading strategies, etc. But there are 2 things that they never discuss:

  • Time Horizons
  • Size of stock holdings in portfolio

But before we talk about importance of these two things, we will like to thank these channels for showing us the real beauty of stock markets!! (Don’t worry: the link takes you to Google search page, no malware or spamware would be installed on your device). 🙂

Sonia Shenoy CNBC TV18
Oh My God!

So why are Time Horizons important? It’s because it helps in deciding whether we should be affected by daily price movements (& news) or not. For example, when Maruti had labor unrest in Manesar and stock was hovering around Rs 1000, it should not have affected an investor with time horizon of 10+ years. The labor problem was a short term blip and provided long term investors an opportunity to pick up a great stock at very cheap price. And as we later saw, Maruti ran up to 1500 in no time at all (i.e. 50% up in 3 months!).

Now we come to Size of stock holding in portfolio. By having a cap on size of individual stock holdings, an investor can keep a check on his risk levels. It also helps in not getting too emotional about a single stock. You may hold the best stock in the world, but putting all your eggs in one basket doesn’t make sense. One bad quarterly result and your entire portfolio comes down crashing. But there is a flip side to this approach too. You can pick as many winners as possible, but if you’re not invested in them to a degree that their positive movement has a significant impact on your portfolio, you are essentially failing.

So to tell you frankly, we watch business channels for entertainment and glamour. 🙂 What about you?

Disclosure: No positions in Maruti Suzuki.

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