1. Your earning potential should be really, really high.
This of course is a fairly commonsensical point. If your salary is 1 crore, 2 crore or even 3 crore, you can invest a lot more and make even higher returns.
The interesting thing to note here is that your earning potential can be broken down into a mathematical formula, comprising of 2 variables-
Earning Potential = [(Skill1 * Time1) + (Skill2 * Time2) + (Skill3 * Time3)…….+ (Skilln * Timen)]
The combination of time and skills allows you to make a certain amount of money.
If you pick up this formula and further bifurcate it, you can reach the conclusion that-
If you have more than 1 skill, and you can invest time into it, then you can create multiple sources of income.
2. Earn more than what you are spending.
Here are 3 key tips to bring down your expenses:
i. Divide your expenses in terms of a hierarchy.
> Needs- pay rent, send your kids to school, household expenses.
> Wants- this could be a hobby you want to invest in (learning an instrument).
> Desires- discretionary expenses (having subscriptions to 5 OTT platforms).
The idea is to cut down spending your money on desires as much as you can.
ii. Avoid impulsive purchases.
You are in a retail store and you do not have a list of items that you want to buy.
You are aimlessly walking around buying random things and end up spending a lot of money.
Having a list will help you save both time and money.
iii. Be in the position of being a minimalistic person.
If you own 30 credit cards, inadvertently you will be using a lot of credit because someday you will be getting cash back on HDFC card, the next day on ICICI card and so on.
You will maintain all those cards and undertake a lot of expenses.
You might feel like you are saving money but instead you are actually being psychologically programmed to spend more money.
You need to put yourself into a position of curated minimalism.
3. Invest. Even if you do not know how to.
Here, there are 2 very important mathematical equations that you need to remember:
i. Currently, inflation rate >> savings rate.
Inflation rate in India currently is around 6.5% and savings interest rate is 2%.
If you keep 100 rupees in your bank account this year it will for sure become 96 rupees next year.
This situation will continue for a very long time, so if you do not invest, you are practically working towards poverty.
ii. There are easy investment instruments you can invest in.
There are passive mutual funds you can invest in. You can also consider investing in small cases.
Though you might lose a little bit of money in terms of commissions, you will at least be avoiding the potential decrease in your money due to inflation.
4. You need to start from bottom-up.
Bottom-up approach simply means that you can first form a safety net, and whatever money is not part of that safety net, you can go and invest.
You need to have an emergency fund which is 6 to 12 times of your monthly income.
Whatever money you have left after making an emergency fund and purchasing life and health insurance, you MUST invest.
This brings us to the concept of holding power.
Many people panic and sell their stocks. This is because they have tied even their emergency funds into the stock market.
And when they see the market tanking, they start panicking and sell their stocks to withdraw their money.
This situation should not arise.
If you have zero holding power in the stock market, you are not going to make money as a retail investor.
Hence having a safety net is super, super important.
Once you have your emergency fund, health insurance and life insurance sorted, you can go and invest money without any fear.
5. You must have liquid money.
Very often young professionals invest in nothing else but only in real estate, and all their money gets tied up to a single asset.
In technical terms, this is negative diversification.
Your investment portfolio has only one asset and that is real estate and all your money is tied to it.
Even the money you will make in the future is tied to it.
This is a very bad way of investing because here, your investment is not liquid.
In 2020, when COVID hit, a lot of people had to undertake high medical expenses. A lot of people had to do something called distressed sale.
Distressed sale means that if you have a house you purchased at 3 crore, you might have to sell it at 1.5 crore just because you have such a massive need for money at that juncture.
This happens to people who have no liquidity.
If you do not have liquid money, you will have to sell important assets in your life in a distressed format.