- Start putting some money aside every month in a recurring deposits. Keep on doing it till you have about 6 months worth of expenses saved in it. This is your Emergency Fund.
- Once you are done with the above or are close to achieving your 6-Months Emergency Fund, try saving some more amount in Fixed Deposits or Recurring Deposits. I know a lot of people will be against this approach as I could have very well suggested going for mutual funds. But I don’t consider Emergency Funds as Savings. So once you are done with accumulation of your Emergency Fund, you still do not have any savings. Right? So you need to save.
- Now once you have accumulated money in your emergency fund and in your savings, time is right for moving on to investing. Investing is what you do when you don’t need the money for more than 5 years. It is done for long term goals like Retirement, Children’s education etc. You can start with a small SIP. And slowly and steadily, keep increasing your SIP amounts every year.
- Frankly, a very small SIP may not be able to help accumulate large amounts of money for retirement. But over a period of time, as and when you reduce your unnecessary expenditures and your income also rises, you can increase your SIPs and see its amazing rewards. It can even help you pre-pone your retirement plans! Isn’t it a dream come true?
And they are doing this for hours at stretch. They are constantly searching for better deals.
So all in all, you would have saved Rs 12,000. That’s it. Could you do better than this? Yes. You could have cornered some better deals and more cashbacks.
You can control your expenses & increase your cashbacks. But only upto a limit… And that puts a limit to how much you can save.
This post makes me think about the debate between Earning More Vs Spending Less. Will probably jot down my thoughts and share it with you all sometime soon. What are your thoughts on this…?
Like me and other common men and women, you would be interested most in tax related announcements. Whether you will be able to save more taxes this year? Will you get more deductions for your home loan repayments? Or will there be no change at all?
But think of it….we focus so much on saving taxes….and so little on correcting our money related common sense.
– We buy insurances to save tax!! And to top it all, we call these insurances as ‘Investments‘ under some section 80C. Ridiculous!!
– We want to Invest for few months. But we Save for years. Ridiculous again!! (Why?)
– Everybody wants to know the name of that next multibagger stock. But nobody is ready to put in the effort to find it. Its just like saying that everybody wants to go to heaven, but nobody wants to die. Ridiculous!!
– We want to double our money overnight. And that does not happen. But we will not understand this simple fact, unless we burn some of our hard earned money. Ridiculous!!
– Currently, Indian markets are trading at almost 24X multiples (Proof in image below). But people are buying stocks like all of them are value investors. Ridiculous!! (Why?)
|Nifty P/E Ratio (16-Feb-2015 to 20-Feb-2015) – Source: NSE Website|
– I have this strange feeling that number of people calling themselves as Value Investors increases during Bull markets. But theoretically, this number should be more in Bear Markets. But surprisingly, its more in Bull Markets. Ridiculous!!
– Everybody believed that new government had a magic wand and it will change everything in a flash. But its almost a year, and frankly speaking nothing much except talks (some are calling it false hopes) have been delivered. But markets are still making new highs every few days. Ridiculous again!!
Apologize my rants 🙂
- Never depend on just one source of income.
- Save atleast 20% of what you earn from all sources.
- Buy a plain Term Life Insurance of Sum Assured amount equal to atleast 30 times your annual expenses.
- Buy a health insurance for yourself and those who depend on you.
- Create an Emergency Fund equal to 6 months worth of your expenses. Till the time you have not created such a fund, don’t think about investing or buying luxury items.
- Start Monthly Recurring Deposits of 6 months. At the end of 6 months, use the maturity amount to create a FD for 1 year. Repeat every 6 months. To start with, use 20% of your savings (in step 2) to start Recurring Deposits.
- Use the remaining 50% of your monthly savings to invest in Stock Markets via SIP in Index Funds or well-established, diversified mutual funds. Do not go for sector specific funds.
- Use remaining 30% of your monthly funds to create a Market Crash Fund (use another RD). Keep saving money in it till the market crashes. When it does, buy quality stocks at low prices. To know which are quality stocks worth buying in market crashes…
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- Gold, silver and precious stones are good for social or religious requirements. These are not investments. These are insurances against bad times. (To understand this point, just think for a moment that will you sell gold or silver in case prices go up? The answer would be a No. You sell these only when everything else is lost. Period.)
- And always remember :
In this post, I am trying to give a suitable response to mail I received from a reader named Shivangi. A part of her mail is given below:
- First of all, you need to recognize the high interest loans (credit cards, personal loans).
- Get rid of them as soon as possible.
- Now pay off loans taken to buy liabilities (cars, gadgets) which do not produce a stream of cash.
- Initiate creation of an Emergency Fund which takes care of unforeseen money requirements.
- Now if you have any long term, low cost loans (property loan) running, you can think of investing simultaneously as you go on paying off that loan.
If you belong to the same generation as me (born in mid-late 80s), then chances are that you would have heard about NSCs, but would not have invested in them. But if you are of a generation prior to me, then chances are high that some of your money might be invested in this instrument.
|National Savings Certificate|
But there is another problem with NSCs. These instruments have a lock-in of 5 years and 10 years. Now this is an extremely long period for our impatient generation. But there is a way in which this lock-in can be managed in a way that an investor receives some money at the end of every year. The approach which I’ll discuss increases the liquidity of NSCs, with a little help from Fixed Deposits. This approach reduces the return a little. But that is a price we need to pay for increased liquidity. 🙂
|NSC Ladder : Click to enlarge|
This is what exactly happens –
- 1st Tranche: Invested Rs 20,000 in FD for One Year – Received Rs 21,600 at end of Year 1 – This sum is invested in NSC for 5 Years – Received Rs 32,750 at end of Year 6.
- 2nd Tranche: Invested Rs 20,000 in FD for Two Years – Received Rs 23,545 at end of Year 2 – This sum is invested in NSC for 5 Years – Received Rs 35,699 at end of Year 7.
- 3rd Tranche: Invested Rs 20,000 in FD for Three Years – Received Rs 25,901 at end of Year 3 – This sum is invested in NSC for 5 Years – Received Rs 39,271 at end of Year 8.
- 4th Tranche: Invested Rs 20,000 in FD for Four Years – Received Rs 28,232 at end of Year 4 – This sum is invested in NSC for 5 Years – Received Rs 42,805 at end of Year 9.
- 5th Tranche: Invested Rs 20,000 in FD for Five Years – Received Rs 30,073 at end of Year 5 – This sum is invested in NSC for 5 Years – Received Rs 45,597 at end of Year 10.
Pay Yourself First. This has often been referred to as the Golden Rule of Personal Finance. So what exactly does it mean and how can you do it?
|Save & Invest before Spending|
- In case you are planning to save for your retirement, ask your employer to automate your PPF, EPF, VPF deductions. In this way, you would have saved for your retirement, before even getting any money in your wallet!! 🙂
- If you are interested in stock markets, you should make regular monthly investments (SIP) in good mutual fund schemes. This can be automated via an ECS mandate to your bank.
|You Action Plan to pay yourself first.|
- Short-term is less than 3 to 5 years
- Long-term is more than 5 years
So don’t forget. Don’t invest for short term and don’t save for long term. 🙂