Try Saving 50% of your Income
Save 50 percent (or more) of your after-tax income. At first glance, this might sound really hard. But the peace-of-mind and flexibility that this generates is worth the effort. Many people achieve this on middle-class incomes. The beauty of a high savings rate is twofold – You learn to live on less even as you have more to invest.
Invest in Equity Mutual Funds
If you are in you’re in your 20s and 30s you should be investing a large part of your savings in the Equity market. I specially suggest Equity Mutual Funds. Read about Index Funds In India before you pick your mutual fund. Always keep at least a 15-20 year investment horizon.
Don’t Panic and sell when the Market Drops
This will be much, much harder than you think. People all around you will panic. The media will be screaming Sell, Sell, Sell. However you will be much richer if you simply hold on and remain calm. Most people end up losing money because they sell out of fear at rock bottom prices and end up buying expensive when the market is on the rise.
Invest More When the Markets are Down
What do you do when your favorite store come up with a Sale? You feel happy and buy some stuff right? You need to think of stock market crashes the same way. Warren Buffett once said that as an investor it is wise to be “Fearful when others are greedy and greedy when others are fearful.”
Fall in Love with the Power Of Compounding
The sooner you understand and appreciate compounding the better. 5 Lakhs invested at a 16% rate of return will get you 19 Crores after 40 years. The power of compounding has made Warren Buffet the 3rd richest person in the world. He has managed a consistent 20%+ rate of returns for over 60 years now. Even Albert Einstein considered Compounding to the 8th Wonder of the World. Read the blog post on Power of Compounding.
The goal is to get money to work for you. What happens in most cases is that we end up working for money to pay off our debts. Living in debt can often turn into a nightmare and if you don’t address the balance of your loans as soon as possible, the interest will make it almost impossible to repay. The best way to avoid this mess is not only to get out of debt as soon as possible, but to avoid it all together.
Do NOT try to time the Market
Nobody can predict when these drops will happen, even though the media is filled with those who claim they can. They are either delusional or trying to sell you something. Ignore them. Fidelity Investments did a study on which client accounts generated the highest returns and they found that dead people make the best investors. Thats because dead people cant time the market.
In the LONG run (20-30+ years) the equity market always goes up and the average investor who tries to time the market will be worse off – unless you are Warren Buffet.
Manage your own Money
It is your money. Nobody will care about it as much as you will. By the time you know enough to pick a good financial adviser, you will know enough to manage your own money. Managing other people’s money has become a very big and lucrative business. By design the financial planner’s interests and that of their clients are in opposition. There is far more money to be made selling complex investments than there is in simple low-cost efficient ones. To do what’s best for the client requires the advisor to do what is not best for himself. It takes a rare and saintly person to behave this way. Money management seems not the calling of the rare and saintly.
Reduce Your Tax Liability as much as possible
A rupee that doubles every year for 25 years grows to 3.35 crores. What do you think the number will be if you take the same scenario and assume that gains are taxed each year at 10%? The ending balance is only 93 lakhs. This number would be a lot lower if you sell anything within a year and pay 15% short term tax.
Live within your means
Majority of rich are people you’d never suspect because they don’t live flashy lives in big houses and own high-status toys. People become rich by spending less and investing wisely. No amount of money is enough if you want to live a high consumption life style. Mike Tyson was one of the most celebrated boxers of all time. After earning 300 million USD he wound up bankrupt. He lived a lifestyle that cost him $400,000 a month.