Investment Basics

This is where you start! Do you know about the story of James Reed, a janitor who retired as a millionaire? Morgan Housel, in his book ‘The Psychology of Money’, shares the story of a guy who used to work as a gas station attendant and a janitor. By the time he left this world at the age of 92, he ended up saving 8 million dollars! Now, someone, who is reading this story for the first time, would most likely assume that the guy won a lottery or he had a long lost relative who bequeathed their fortune to him.  However, none of that is true. His fortune was made because of a simple, doable tool – ‘powerful saving and investing habits’. What did he do? Every month, he would save a certain bit of his salary and invest in blue chip stocks. Due to these easy saving and investing habits, he died as a millionaire! Lessons learnt: This simple story gives us three very specific and powerful lessons: 1. Anyone can invest Most of us do not invest because we feel that we do not have the background or expertise to invest. We assume that we need an MBA or need to have a finance background to even think about investing.  But, if you notice- the biggest investors around the world, such as George Soros and Dennis Gartman do not have an MBA degree. This simply proves the point that anyone can invest. Still worried about how and where to start? Fret not, we are here for you. On Wisdom Hatch, we’ll break down investing for you. Step by step. 2. Power of saving James Reed had a modest salary throughout his career, but he made sure that he saved every single penny that he could.  A lot of people question – what percentage of salary should we save?  That is an incorrect question to ask. We must understand what percentage of salary we really need to spend?  Now, don’t become a miser and save every single rupee you earn. But, you need to be wise about how you spend your money. A simple exercise to decide how and where to spend your money? Divide the things you buy into three buckets: NEED – food, rent, grocery WANT –  multiple OTT subscriptions, frequent food and travel outings LUXURY – luxurious vacations, expensive cars Spend on needs such as food, utilities etc. Cut down on your luxuries and wants. Invest the money you are left with. Basically, money is all about your habits: If you are someone who is an incessant consumer of items, then you would end up spending most of your money. There is a very clear difference between being rich and being wealthy: Being rich means that you have got the money and you are spending it. For example, if there is a person who has won a lottery, he is rich. He might not be wealthy. Wealthy is someone who is able to sustain that wealth once they become rich. They have the mindset to generate future cash flows and future returns. For example, the Rockefeller have been building their wealth over generations because they have the mindset to invest and grow their wealth. On the other hand, if a person has bought several items such as a phone, car on EMI, then that is a monthly negative outflow and it would probably be impossible for him to become wealthy. So, decide how and where you are spending your money wisely! 3. Need for investing The third key lesson is about why do we actually need to invest? Once you build enough savings, why is it that you need to invest?  Before we discuss that, let’s learn about Inflation:  A basket of apples that cost Rs. 100 last year, would now cost you Rs. 106. That is a 6% rise in prices. Similarly, the prices of most of the goods keep increasing year after year. This general rise in prices of goods is called inflation. Even if you make a million dollars and if you have that sitting in your bank account, your bank account is not going to pay you enough interest rate that would offset the inflation.  For example, if your bank pays you 5.5% and the annual inflation is 6%, you will end up losing your money by 0.5% every year. And every year, that portfolio of money sitting in your bank account will keep on decreasing. And this is where the 8th Wonder of the World comes in – the “Power of Compounding”. Take the Rule of 15*15*15 which states that if you invest Rs. 15,000 every month for a period of 15 years, at the rate of interest of 15%, then at the end of that 15 year period, that money will grow to become Rs. 1,00,00,000. (That’s right, Rs. ONE CRORE) Now, let’s see what happens if the time period becomes 30 years? The money grows to become Rs. 10,00,00,000. (You read it right, Rs. TEN CRORE!) Making the time period 2x, makes the money 10x!! This is the Power of Compounding! So, the point is simple: If you do not invest, you lose money due to inflation year after year. If you invest, you can multiply your money due to the Power of Compounding. Let’s recall: Anyone can invest. To become wealthy, you need to have good financial habits. When you invest your money in the right assets and stay invested for long, that is when the true magic happens!

Investment Basics Read More »