Investment, investing, financial goals, financial freedom, do these words make you anxious whenever someone mentions them? It is not just a mere observation but a harsh reality. A majority of people, even today, don’t have the adequate financial understanding they should have. That, added with the even nerve-wracking industry jargons, makes it even more difficult to understand the world of finance. All this may make it seem like investing is catered only to the smartest of us. Know that this is completely wrong. Thoroughly understanding the ins and outs of this domain isn’t as hard as it looks, all it requires is diligence and common sense. Hence, here’s a guide that decodes investing. Read this and you’ll never feel the same way about investing or money ever again.
What is Investing?
Investing, in simple terms, means putting your money into something with the expectation of getting more money back in the future. It’s like planting a seed and watching it grow into a tree that bears fruits. The goal of investing is to build wealth and achieve financial goals, such as buying a house, saving for retirement, or funding your children’s education. It’s a way to make your money work for you and potentially earn more money over time.
Understanding the Difference Between Saving & Investment
Saving and investing are both important financial practices, but they have distinct differences in terms of purpose, timeframe, and risk. Understanding the difference between the two is the key to being a better investor.
Saving money refers to setting aside some income for later use, where the amount depends on the money left over after expenditure is subtracted from income. It’s the most straightforward form of wealth accumulation. It involves keeping your money in safe and easily accessible accounts such as savings accounts or Fixed Deposits. The primary purpose of saving is to preserve your money and ensure it’s readily available when needed.
But it doesn’t protect against inflation and doesn’t lead to long-term financial growth.
Here’s where investing comes in. By using a part of your money to buy assets that increase in value over time. The objective of investing is to grow your wealth and achieve financial goals beyond the scope of short-term needs.You can generate long-term wealth and achieve important milestones such as education, weddings, and retirement.
The timeframe for saving is relatively short, usually focused on meeting immediate or near-future expenses. It’s ideal for goals like building an emergency fund, saving for a vacation, or purchasing a car in the next few years. Investing, on the other hand, is a long-term commitment. It involves a longer timeframe, often spanning years or even decades. Investing is suitable for goals such as retirement planning, buying a home, or funding a child’s education.
While saving focuses on preserving capital and maintaining liquidity, investing aims to generate higher returns by taking calculated risks. Investing requires careful research, diversification, and consideration of factors like asset allocation, market conditions, and individual risk tolerance. Saving, on the other hand, is more straightforward and provides a foundation for financial stability.
Why is Investment Important?
While there’s a very simple explanation, which most of you may be aware of already. But let’s understand it with an example which all of us can connect with.
It is lunch break. You open your Instagram account and you see this person, almost your age, sharing pictures of a life you always imagined for yourself growing up. Pictures of him/ her inside cozy hotel rooms across India or outside the country, them casually taking a stroll on the beach, hiking mountains, posing in front of Eiffel Tower or them sharing pictures with new strangers they met while traveling… full on Bunny’s life from #YehJawaaniHainDeewani.
You see posts of a person or couple in a quaint lake-side house along with different pictures that speak of one thing only; they are having fun while you are stuck with your 9 to 5.
Or a friend of yours who recently brought your dreambike. One that is very expensive while you still ride a regular commuter bike.
Don’t you feel jealous?
I bet you do. Almost everyone does. I know I would. There are many people out there who are simply living their dream life because they have a lot of money. Talking about money, there are three ways you can have a lot of it:- (1)You inherit it (2) You hustle hard, get a well paying job and earn lots of it, (3) You start investing smartly and accumulate it.
While the first two options apply to specific people, the third one is available to all. Irrespective of how much you earn, you can smartly invest your money and sooner or later, can live the life you wanted for yourself. While there are more important, more crucial reasons to invest, the above gives you a gist of how having planned your finances properly can give you the freedom you need.
- Financial Independence: Investing money allows individuals to achieve financial independence and not rely solely on others for their financial well-being. It empowers them to make their own decisions and pursue their goals.
- Fulfilling Dreams and Aspirations: Investing can help individuals fulfill their dreams and aspirations, whether it’s traveling, owning a house, starting a business, or pursuing higher education. It provides the financial means to turn these dreams into reality.
- Beating Inflation:The value of money diminishes over time, as prices go up, in a process called inflation. Ideally, you should opt for a smart investment that generates more interest than the mean rate of inflation.
- Capital Growth: The point of investing is financial growth. This will enable you to achieve your personal goals- whether that’s higher education in a different country or even FIRE. By investing smartly, individuals can build wealth over time. It allows them to grow their financial resources and create a secure future for themselves and their families.
- Funding Bigger Things: We all have a materialistic side that craves for the finer things in life, like a new car, a bigger house or a foreign vacation. These aren’t achievable on a monthly salary, but the right investment decisions will help us buy them eventually.
- Saving Tax: Ah, the plight of earning a higher salary- giving up more in taxes. While the system in India is strict, investing in the right tax-saving instruments can help you save tax.
- Retirement Planning: Investing is crucial for securing a comfortable retirement. It enables individuals to build a retirement corpus that can provide a financially stable life during their golden years.
- Overcoming Income Disparities: Investing can help bridge income disparities by enabling individuals to grow their wealth independently. It provides an opportunity to earn additional income and accumulate wealth irrespective of salary differences.
- Emergency Preparedness: Investing helps individuals create an emergency fund to deal with unforeseen circumstances. Having a financial cushion provides peace of mind and ensures they are prepared for any financial challenges that may arise.
- Empowerment and Confidence: Investing instills a sense of empowerment and confidence. It equips individuals with the knowledge and skills to navigate the financial world, make informed decisions, and take control of their financial future.
Understanding Short-term & Long-term Financial Goals
“The difference between a dream and a goal is a timeline and an action plan.”
Financial goals are specific targets or objectives that individuals set for themselves in order to achieve financial stability, security, and success. These goals can be of two types: short term and long term. The distinction between these two types of goals lies in the timeframe and the nature of the goals themselves.
Short-term Financial Goals: Short-term financial goals: These goals typically have a duration of one year or less. They are focused on immediate or near-future financial needs and can be achieved relatively quickly. Short-term goals often involve managing day-to-day finances, addressing current expenses, and building a foundation for financial stability. Examples of short-term financial goals include:
- Creating an emergency fund to cover unexpected expenses
- Paying off high-interest credit card debt
- Saving for a specific purchase, such as a vacation, a new electronic gadget, or furniture
- Covering medical expenses or car repairs
- Building a budget and tracking expenses to manage cash flow effectively
- Saving for a down payment on a car.
Long-term Financial Goals: Long-term financial goals: These goals typically extend beyond a year and are focused on achieving significant milestones or securing a stable financial future. Long-term goals require consistent planning, saving, and investment over an extended period. They often involve larger sums of money and may require more complex strategies. Examples of long-term financial goals include:
- Saving for retirement and building a sufficient nest egg.
- Funding higher education for oneself or family members.
- Purchasing a home or real estate property.
- Starting a business or entrepreneurial venture.
- Accumulating wealth and achieving financial independence.
- Creating a comprehensive estate plan.
- Achieving specific investment or wealth targets.
Common Financial Goals in India
- Emergency Fund: Setting up an emergency fund is a crucial goal to cover unexpected expenses like medical emergencies or job loss. It provides a financial safety net and helps avoid relying on debt during challenging times.
- Marriage Expenses: Saving for marriage expenses is a significant financial goal for many Indians. Planning and budgeting for wedding ceremonies and related expenses are essential to ensure a smooth and financially stable transition.
- Downpayment of House: Accumulating funds for a downpayment on a house is a common financial goal. Saving a substantial amount helps in securing a home loan and realizing the dream of homeownership.
- Buying a Car: Many Indians aspire to own a car for convenience and improved mobility. Saving for the downpayment and budgeting for monthly car loan payments are important steps towards achieving this goal.
- Expensive Travel Plans: Indians often have aspirations for luxury travel experiences and exploring exotic destinations. Saving and planning for expensive travel plans allows individuals to fulfill their wanderlust and create memorable experiences.
- Children’s Education: Planning for children’s education is a high priority for Indian parents. Saving and investing in education funds, such as a child education plan or a dedicated savings account, helps in funding higher education expenses for their children.
- Retirement Planning: Preparing for retirement is an essential financial goal for long-term financial security. Indians focus on building a retirement corpus through investments, pension plans, and other retirement savings vehicles to maintain a comfortable lifestyle after retiring from work.
- Future Business Plans: Many Indians aspire to start their own businesses or entrepreneurial ventures. Saving and planning for future business plans, including capital investment and operational costs, is a significant financial goal for individuals with an entrepreneurial mindset.
Types of Investment Tools in India
There are several investment tools available in India that cater to different investment objectives, risk profiles, and durations. Here are some common types of investment tools:
- Fixed Deposits (FDs): Fixed deposits are low-risk investment options offered by banks and post offices. They provide a fixed rate of interest over a specified period, offering capital protection and steady returns.
- Public Provident Fund (PPF): PPF is a long-term investment scheme offered by the government. It offers tax benefits and a fixed interest rate, making it an attractive option for individuals looking for stable returns and retirement planning.
- Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They offer various types such as equity funds, debt funds, balanced funds, and provide opportunities for growth and income generation.
- Stocks: Investing in stocks involves buying shares of publicly listed companies. Stocks offer potential capital appreciation and dividends but come with higher risk due to market fluctuations. It requires research and analysis to select the right stocks.
- Bonds: Bonds are debt instruments issued by governments or corporations to raise capital. They provide fixed interest payments and return the principal amount upon maturity. Bonds are relatively safer investments compared to stocks.
- National Pension Scheme (NPS): NPS is a retirement savings scheme regulated by the government. It allows individuals to contribute towards their retirement and provides tax benefits. The accumulated corpus is invested in a mix of equities, bonds, and government securities.
- Real Estate: Investing in real estate involves purchasing residential or commercial properties for capital appreciation or rental income. It’s tangible and non-volatile. This form of investment requires higher upfront charges as well as regular maintenance costs. Real estate investments can be long-term and require careful evaluation of location, market conditions, and legal aspects. Rent offers a steady stream of income.
- Gold: Gold is considered a safe-haven investment and a hedge against inflation. Gold assets such as ancestral jewelry hold sentimental and cultural value and are hence widely owned forms of wealth. Investors can buy physical gold, gold jewelry, or invest in gold exchange-traded funds (ETFs) or sovereign gold bonds. Gold bonds are also available in the market for those who do not want to purchase jewelry. It is considered a hedge against inflation as it is constant even when currencies drop. However, gold prices can fluctuate, outperforming other assets sometimes while lagging behind other times. Keeping anywhere from 5 to 20% of your portfolio in gold is advisable for diversification.
- Unit Linked Insurance Plans (ULIPs): ULIPs offer both investment and insurance components. They provide the opportunity to invest in a variety of funds based on risk tolerance and financial goals while providing life insurance coverage.
- Post Office Savings Schemes: Post Office offers various investment schemes like Monthly Income Schemes (MIS), Senior Citizen Savings Scheme (SCSS), and National Savings Certificates (NSC) that provide fixed returns and are backed by the government.
- New-age investments (Crypto, NFT, Collectors’ Items): For those daring enough, unconventional investments exist. These require thorough research and understanding, For example, Cryptocurrencies and Non Fungible Tokens, that run on blockchain technology. They’re based on a decentralized vision of finance that is not subject to traditional systems. Skeptics are concerned about the volatility in this market as it is unregulated and rife with misinformation. You could also explore collectors’ items, such as rare sneakers, handbags, stamps etc.
Getting Started with Your Investment Journey – Things You Must Do
When embarking on your investing journey, there are several important steps you should take to set yourself up for success. Here are some key things you must do to get started:
- Set Clear Financial Goals: Define your financial goals, both short-term and long-term. Determine what you want to achieve through investing, such as saving for retirement, buying a house, or funding your children’s education. Clear goals will help guide your investment decisions.
- Assess Your Risk Tolerance: Understand your risk tolerance, which is your ability to handle fluctuations in investment returns. Consider your age, financial responsibilities, and comfort level with market volatility. This will help you determine the appropriate investment strategy and asset allocation.
- Educate Yourself: Gain a solid understanding of investment basics, such as different asset classes (stocks, bonds, mutual funds, etc.), investment vehicles, and market trends. Read books, attend seminars, and leverage online resources to enhance your knowledge.
- Build an Emergency Fund: Before investing, establish an emergency fund to cover unforeseen expenses or financial emergencies. Aim to save three to six months’ worth of living expenses in a liquid and easily accessible account.
- Pay Off High-Interest Debt: Prioritize paying off high-interest debts, such as credit card debt or personal loans. These debts typically carry higher interest rates than potential investment returns, so eliminating them can improve your overall financial health.
- Create a Budget: Develop a budget to track your income and expenses. Ensure that you have sufficient disposable income to allocate towards investments. Consider cutting unnecessary expenses and increasing your savings rate.
- Start Small and Diversify: Begin with small investment amounts to gain experience and confidence. Diversify your investments across different asset classes and sectors to reduce risk. This can be achieved through mutual funds, exchange-traded funds (ETFs), or robo-advisors.
- Choose the Right Investment Accounts: Determine the appropriate investment accounts based on your goals and tax implications. Examples include individual brokerage accounts, retirement accounts, or tax-advantaged accounts like a Health Savings Account (HSA).
- Seek Professional Advice if Needed: Consider consulting with a financial advisor or investment professional, especially if you’re unsure about investment strategies or need personalized guidance. They can provide insights tailored to your specific circumstance.
- Stay Informed and Review Regularly: Keep up with financial news, monitor your investments, and review your portfolio periodically. Market conditions and your financial goals may change over time, so it’s important to adjust your investment strategy accordingly.
Remember, investing is a long-term endeavor that requires patience, discipline, and a well-thought-out plan. By taking these essential steps and remaining committed to your financial goals, you can set yourself on a path toward financial success and wealth accumulation.