How to start Investment
Investment is nothing but utilizing your hard-earned cash to a market tool by which you can get good returns for your money. When we have money in our hands as spare, we can start thinking of how to spend that money. But wait….. if a thought comes in your mind about saving in the first instance after getting your salary, I must assure that you are going to be financially fit person. The reason for this is explained in the basics of Personal Finance blog which is worth reading for if you are newly exposed to the market or got your first salary in hand.
In this blog, I will keep my focus on other things, keeping in mind that you already had gone through my other blog on Personal Finance and know a bit about want and need part of your salary. So I will discuss only the Saving part, but let me correct myself for you, that you should feed Investment in place of Saving in your mind. The reason for this is simple that Saving can not beat inflation prevailing, so saving part can not make you wealthy. So you must invest your saving part which in turn would produce rewards in terms of profit.
Reason to Invest
Everybody needs the money and everybody wants to multiply it, but through saving it can not be achieved because of inflation and other factors. So we must seek some other solution where the growth of deposit can be expected and it is only possible when that particular solution has return beating the inflation rate.
But the market is a complex structure and combination of Insurance, Deposits, Stocks, Debenture, and many other market tools. While each money making tool is associated with its own strategy to grow, advantages, and risks, we all must have three objectives like Safety, Returns, and future growth before handing over money to any market tool.
So to start learning about the basics of Investing, I must recommend you all, a famous book “Rich Dad Poor Dad” by Robert Kiyosaki. He tries to explain the basics in a very simple term, that we must invest our money in Asset class only and not in Liability. So we should start with the basic terms associated with investments first:
An asset is something that puts money in your pocket. For example, Investing in Bonds, Real Estate, etc which will obviously beat the Prevailing Inflation rate and fill your pocket with the handsome bonuses.
is something that takes money out of your pocket. For example, Car which we think as a need and asset because we have to commute but think deeply that car requires maintenance and daily fuel charge that means it is draining your money out of your pocket.
An interesting example is that of Building purchased with loans or in cash, So in which category it should lie in, Asset or in liability? The simple explanation to it is if the same building is used by you or your family to reside in and not giving any return than it is a liability and if the same building is on rent and giving you money in return than of course it is Asset.
So if your invested amount is making some cash coming into your pocket over a short or long term period than the investment is an asset. So Stocks which includes Mutual Funds as well, Real Estate, Intellectual Property, Gold are some example of an asset.
But one point is worth mentioning that Asset also requires money to put in to acquire that asset which in long term will be generating cash flow for you. Whereas Liability not only requires money to acquire but also drains out the money in maintenance thereafter.
Generally, we purchase Insurance thinking it as an asset for long term measures, and here we commit a mistake. Because Insurance is for back up in case you are not there with your family and it is not a money-making tool but a backup. If you calculate the returns over a long time in insurance then it can be easily assessed that returns are not able to beat inflation so how come it can be categorized as an asset?
In one of my earlier blogs, I discussed the need and purpose of Insurances and why you must not spend your money unnecessarily on them except for a few. Everyone must have just a handful of Insurances with them and not all of those available in the market.
Here I must stress that your saving part must be used to build your investment basket. Robert Kiyosaki also gives a great concept of the mindset of various classes of people in which he beautifully explains how Rich People use their income to build assets whereas middle class and poor class people acquire liabilities thinking that they are buying an asset.
Another important factor that is important to mention is about Latte Factor as made popular by David Bach in his book ‘The Automatic Millionaire‘. This Latte factor refers to the very minute but regular spendings on things which appeared important in the short run but will cost you a huge in long run like Movie Tickets, Taxi/Bus charges, Outside Food, etc. So if you can cut short these small spending, it will be a major step in the improvement of your financial health.
Another important point to consider is ad hoc spendings that means the spendings we make just at the spot. for example, you have no intention to buy clothes for you in the month but suddenly you saw a heavy sale on clothes and end up in purchasing. This is going to spoil your balance in the long term, So, it is recommended to have little patience while going to make such purchases and must implement different measures to avoid these sudden purchases.