Personal Finance

Lessons on Personal Finance everyone should know

Personal Finance is not rocket science. All it takes to be financially successful in life is to know the basics of managing money and to have discipline. In this post, we expand upon the basic principles of money management that everyone should be aware of

#Early Bird catches the worm

It is very important that you start investing as early as possible. Investment gurus like Warren Buffet built the majority of their earning in the latter part of their career. This is because of the effect of compounding. A mere difference of 5 years can make a huge difference in the amount of money ( almost double) that you need to save everymonth to reach your investment goal. Be the early bird.

#Anticipate hidden dangers

Many a people get overenthusiastic about investing and start with aggressive plans. However it is essential you anticipate any dangers that can erode the effect of your savings. Two examples are life insurance (term insurance) and health insurance. An illness could easily wipe off your entire savings in a matter of weeks. It is therefore essential that you take a good life insurance and health insurance before you set out to save and invest.

#Invest after Debt Servicing

There are two lessons here. You should never incur debt inorder to invest, howevermuch alluring the returns might be. High returns always come with commensurate risk. We often think too much about the returns that we can obtain while ignoring the chance that we might end up losing all capital that we invested. It is therefore very important that you never borrow inorder to invest.

It is also important that you service your high interest debts before you make grand plans to save. For example, Credit Cards carry high interests which can reach upto 18-20%. No other investment can match these interests that you are paying. Therefore you should only invest money after you service your high interest debts.

#You need to have specific investment Goals

It is very important that you have set specific targets that you intend to achieve through your investments. This is essential because you will be able to plan how to reach these targets only if you know what you want you want to achieve. Aimless and haphazard investments are no better than not investing. You will end up with a wad of cash lying around in so many places, that in the end you will be a confused investor trying to come back to senses.

#Get Educated

Investing, much like any other human endeavor, is a skill. This skill has to be acquired, honed and polished throughout your investment career. It is a myth that some people are well educated in finance just because they got a college education. Unless you have put in effort to understand about finance, you will remain as illiterate as any other person out there.

#Keep it Simple, Stupid

It is important to keep your finances simple. Some of the simple ways you can achieve this are

  1. Keeping a single savings bank account
  2. Not investing in 10-11 mutual funds
  3. Having a master document with all the details of your finances (The thumb rule is you should be able to navigate to any of your documents in three clicks of the mouse)

Just like the lesson of Arjuna aiming at the bird, an investor should be focused with a single objective. To achieve this it is imperative that he keeps his process and procedures simple.

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