Some people truly want nothing more than a few acres in view of a mountain, a log cabin, a faithful dog, and a good book to read on the porch. Others want fast cars, ocean-side villas, expensive watches, and trust funds stuffed with so many stocks, bonds, mutual funds, and real estate properties, their great-grandchildren won’t have to worry about anything. Be it anyone, everybody needs to build wealth to fulfill their dreams.
At its core, investing money wisely comes down to a handful of behaviours in which you, as an investor, can engage to harness several powerful forces to build wealth for your family.
Here are a few rules to invest money wisely:
1. Control Your Expenses
Budgeting is the simple exercise of reconciling your income with your expenses and should be your first step. Note down your monthly spending as per your ease of usage: Excel sheet, simple diary, mobile app, or desktop. The aim is to know how much you spend under various heads. After you have budgeted for 3 to 4 months, you will realize that your expenses can be sorted in to 3 categories: essential, discretionary and entertainment. Once you’ve identified the outgoing amount, put away 10–20% of your salary every month before you start spending.
2. Never Own Something You Don’t Understand
If there is one rule that could save tremendous amounts of financial heartache it would be this: Do not buy or hold anything you can’t explain to a kindergartener in three sentences or less — how it makes its money, what its potential pitfalls are, and how that money finds its way into your hands. This sounds so simple — and it is — but a very few people seem to follow it.
It is very easy to get seduced by the seemingly big returns, the terrific performance in the last quarter, the rate at which people are buying it, etc. But if you don’t understand how it actually works, you’re more likely to lose money, even at a time when others are cruising through.
3. Take Advantage of the Power of Compound Interest as Early as Possible
Wise investing means harnessing the power of compound interest. The younger you start, the easier it is to amass a jaw-dropping net worth. This is one of the reasons it’s so easy for the rich to get richer: When you set up a trust fund for your children or grandchildren, they get to benefit from a lifetime of compounding, watching their money grow while in primary. Those extra years are extraordinary in terms of final outcomes. Let’s use an example to make it easier to understand.
Assuming that the rate of interest is 6%, if a person invests a principal of Rs. 10,000, at the end of 30 years, the interest on that Rs. 10,000 will amount up to Rs. 50,225.
4. Protect Yourself Against the Downside by Proactively Managing Risk
Risk is ever-present when managing your money and investing wisely requires you to respect it while simultaneously reducing it. If you don’t, you can wipe out years, maybe even decades or a lifetime, of savings; savings for which you sold hours of your life in exchange for that cash; hours you could have been sitting on a beach, writing a novel, learning to paint, sailing off the coast of Mumbai or Goa, or pursuing your favourite hobby.
Perhaps nobody applies this concept better than billionaire investor Warren Buffett. His holding company, Berkshire Hathaway, has an estimated $60 billion in cash and cash equivalents sitting on the balance sheet. He piles up money, sometimes for years on end. In fact, almost throughout the whole of the decade of the 80’s, he didn’t buy a single stock at all. He waited for the right opportunity to pick up incredible enterprises that he then has sat on for decades.
