Investing money is a challenging task, and not everyone is good at it. The story of Sushil Kumar, who won 5 Cr rupees on the famous show KBC in 2011, highlights the importance of investing money wisely. Sushil Kumar’s after-tax earnings would have been around 3.5 Cr, and if he had invested that money at 6%, he would have made 7 Cr today. Unfortunately, he did not invest his money well and lost most of it. This story is not unique; many people fail to invest their money wisely, resulting in lost wealth. In this article, we will discuss 7 money rules that could help you avoid losing your wealth.
1. Money Loses Value Very Fast
The first rule of investing is to understand that money loses its value very fast. For instance, the US dollar has lost its buying power by 96% since its inception. This loss in value is due to inflation, which is why the goal of investing for most people is to beat inflation. In India, assuming 7% inflation, the value of 1 Cr rupees 15 years from now will be 36 Lakhs. Thus, investing in assets that can beat inflation is essential.
2. Target Returns Differ from Country to Country
In Japan, you can keep your savings in the bank and relax because their target inflation rate is close to 0%, which won’t eat up your savings. Even the markets in Japan have given close to 0% returns over the last 30 years. However, in faster-growing economies like India, investing in slightly riskier assets is necessary to beat inflation. Thus, it is important to consider the target returns in your country when investing.
3. Buy Term Insurance Early
Only 3 in 10 urban Indians have term (life) insurance plans. A term plan can safeguard your family’s finances in the unfortunate event of your demise. Buying early allows you to lock in premiums at cheaper rates for the entire duration of the policy. It is important to speak with an insurance expert to find the right plan for your needs.
4. Investing in FD
An emergency fund, about 6-7 months’ salary, should be in FD or liquid debt funds. On top of this, some additional liquid money should be reserved, which enables you to take good, timely opportunities in the market, such as the 2020 market crash.
5. Buying Non-Paper Investments
Buying non-paper investments such as land, property, or physical gold is important. These assets are hard assets, and the government cannot print crazy money and deflate them. Every time the government prints more money, the value of these assets goes up because there is a limited quantity of these assets.
6. Taking Good Loans
Taking a loan that either gives you tax benefits or helps you make more money/produce a cash flow is considered a good loan. For example, a loan for education or a loan to start a business is a good loan. On the other hand, taking a loan for buying a car or an iPhone is bad debt because there are no tax benefits, and it results in a recurring expense. Buying land or property is a good debt because it provides tax benefits and can also become a passive income stream.
7. Manage Your Cashflows
Managing your cash flows is crucial for maintaining your financial health. Your EMIs (Equated Monthly Installments) should not be more than 30% of your salary. If you have a huge cash outflow every month, an urgent requirement of cash results in a distress sale of investments. This could lead to avoidable losses, so it’s essential to maintain a healthy balance between your income and expenses.
Building wealth is not just about making money – it’s about making smart financial decisions that will help you achieve your long-term goals. By following these seven money rules, you can build a strong financial foundation that will help you navigate the ups and downs of the market and achieve financial freedom. Whether you’re a seasoned investor or just getting started, these tips can help you build a successful and sustainable financial future.
Investing is hard, but it’s essential if you want to build long-term wealth and achieve financial freedom. By understanding the seven money rules outlined in this article, you can make smarter financial decisions that will help you achieve your goals. Remember to invest for the long term, diversify your portfolio, and avoid unnecessary risks. With the right mindset and the right strategies, anyone can become a successful investor and build a brighter financial future.