Being brought up in a middle-class Marwari business family, I have always been subtly taught the dynamics of money along with my two siblings. There were small things that we were asked to do such as counting the money, filling the bank receipt, accompanying my father to the bank, and depositing the money. My father would sometime ask us to mind his shop and make invoices. On the other hand, my mother allowed me and my sister to go on our own and buy our Diwali dresses from a very early age.
My parents never said no to what we demanded, but we always knew what we could ask for. Without any gender-bias, we were always taught to be self-dependent. All three of us (me and my siblings) started earning our pocket-money just after completing our 12th standard. I remember saving the amount and using it for my MBA entrance preparation. Until then, I mostly saw the good side of money and always loved it for all the comfort it brought. Though, I was never fascinated with having too much money.
The harsh reality of money hit me hard when I got selected for an MBA college. I never planned to go to that college as it had an exorbitant fee. And I knew we didn't have that kind of money. But somehow, I landed in that college and my father was determined to make it work for me. So our next plan of action was to take an education loan. Quite soon, we figured out that we can't get one without mortgaging something or a guarantor. We didn't have any of these. I remember this period as the one when I started hating money. I saw the worst side of my closest family members who put money/property at the forefront and relationships down the grave. And this is the biggest reason I want to be very clear with any aspect related to money with my friends/family. I remember my father reaching out to a relative for becoming the guarantor for my education loan. And his reply was a big NO. I was awestruck with his reaction but this told me a very important lesson of my life. I promised myself that never in my life this kind of situation would arrive again. But I also didn't know how to do that? I just knew that I have to save.
So I started saving once I paid off my loan. I was just savings in my savings account that I now understand was a big mistake. If you are asking why then here is a simple answer - The interest rate you receive on your savings account (3%-4%) often doesn't match with the inflation (currently at 6%). What does that mean? It means if you have saved 100 rupees in your savings account it will only become 104 rupees (4% interest) but what you could buy for 100 rupees would now cost you 106 rupees (6% inflation). It means that the purchasing power of your money is decreasing. I knew this but I understood this concept lately when I started investing for around 4 years back. At that time too, my investments were mainly to save the taxes.
Just like most of us, I also invested as per the suggestion of a broker/consultant. A few months back, I asked my broker a simple question related to my investments and realized that he is not educated to guide me while I was trusting him with my hard-earned money. That was the day I thought of making myself financially aware. I wanted to take charge of my investments but I fear this domain just like many of us do. Unlike our parents who had limited investment options (such as FD, PPF, Post Office Savings, etc.), we now have many to choose from starting with mutual funds, gold bonds, real estate, stock market, and whatnot. And it feels overwhelming to even think of taking the charge and researching all of these dreadful words.
I had two choices - either to learn or believe a consultant. With all the fear in my mind, I preferred the first option and joined a course on Financial Management offered by a women-centric community named as Women on Wealth (WOW). Communities are love and this is one of the communities that really believe in their mission. I am in the 5th week of their 10-week long program and there are so many things that I have learned till now.
Important things that I have learned:
Categorize your investment in short-term (1-3 yrs), mid-term (4-7 yrs) and long term (>7 yrs).
Your emergency fund should be 6 times your monthly expense (including the monthly investment amount) and should be easily available when needed.
Compare investment product returns with the inflation rate.
Don't get trapped in an endowment plan or a plan that says invest x amount now and get 2x amount in z years.
Investment and insurance should never be mixed.
Invest directly in mutual funds and not via a broker.
Money brings you happiness and that's what I want to write about on this blog. So I thought it would be nice to share with you whatever I have learned to ensure that you don't repeat the same mistakes that I did and also to make your money work for you. Here are some important questions that you should ask to make a better investment choice :
Cost
What does it cost me to buy the product (load)?
What does it cost me to stay in the product (ongoing cost/expense ratio)?
What does it cost to exit the product (exit load)?
Return
What would be my return?
We are investing for a return so this is indeed a very important question to ask. There could be a guaranteed return (Fixed Deposits) or there could be market-linked return (Stocks). Return and risk are correlated which mean if you want low risk then your returns would be low too and vice-versa. For market-linked return (no assured future returns), its always good to know how much is the average return of the product for the last three, five, and ten years. A word of caution is not to get trapped in the word like a bonus or any other number that's not directly linked to your investment. Also, compare the returns with the existing inflation rate.
Lock-in
What is the lock-in period?
As the name suggests, it means that you can't take out the money for a certain period of time. Your FD may have a lock-in period of 3, 5, or 10 years. Public Provident Fund (PPF) has a lock-in period of 15 years which means you can't withdraw your money from a PPF account before 15 years (few exceptions). Depending on the investment product, you may have to pay an exit fee (exit load) if you withdraw before the lock-in period or maybe there is no exit policy at all.
Cost to exit early
Can I exit or not? If yes, What is the cost to exit early?
There could be two cases. One is that you want to exit before the lock-in period is over. This means that you want to stop paying the monthly/annual amount and withdraw your money. The other one is you want to redeem your money before the lock-in period. Example: you want to break your FD before the lock-in period.
Holding Period
How long do I need to hold the product to make it work for me (good return)?
Always, always know that your investments should be categorized in short-term and long-term. There are investment products that would yield return only when invested in the long-term so don't have them for your short-term need and vice-versa.
Taxes
Do I need to pay taxes on the returns (interest/dividend/profits/final redemption amount)? Or am I saving taxes by investing in this product?
You can save taxes of up to Rs. 1.5 lakh every year under Section 8OC.
I am still learning. I may write another article on different ways to invest once I have learned/read enough about the same. Meanwhile, you can reach out to the WOW team to join their Money Gymmers Program (there is a fee) and if you can't then just start with this book - Let's Talk Money by Monika Jalan.
I really suggest that you start investing even if you just have Rs. 500 to invest every month. And remember you always have money to invest if you keep a close check on your spending. The better way is to invest first and spend later.
And yes, I do love money but I still don't have it in the first place in my priority list. It still holds the place in the top 5. Happy to hear about your investment journey.
*Product here means investment products such as FD, PPF, Stocks, etc. A word of caution is that I am still learning so read, ask, and understand before investing.
this is so well put Rachna... keep collecting and sharing such wisdom with us...<3
Interesting stuff to read. Keep it up.