The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "A successful man is one who can lay a firm foundation with the bricks others have thrown at him." ~ David Brinkley

10 Steps to Make Investing as Easy as Cooking


Cooking any dish involves a basic procedure. Apply the same process to investing too and you will realize how easy it is to manage your money.

Step 1
Check if all systems are Ok
PUT AN INSURANCE PLAN IN PLACE

Before you start cooking, it is advisable to check the gas pipes, regulator and electrical connections. Gas leaks from damaged pipes or faulty regulators; loose electrical connections cause sparks; old wirings trigger short circuits. These can cause major fires. Therefore, your kitchen should be well protected thru’ fire extinguishers.

Likewise, your finances too should be adequately protected. One stroke of bad luck and your years of savings may disappear. This is where insurance comes in. Insurance covers are available for various kinds of perils. Choose a suitable mix — before you begin investing — and safeguard your finances.

Step 2
Plan your menu
MAKE YOUR PERSONAL FINANCIAL ROADMAP

If you have time, you may prepare a 5-course meal. But if you need something fast, you may go for a sandwich. If you are a vegetarian, you will surely not have meat. In short, individual tastes, specific situations and the budgets differ. Therefore, your choice of dishes will be different from your colleagues, friends or even your family members.

Similarly, each person’s investment objectives, risk appetites, time-frames and taxation also differ. If you can take higher risk, equity may form 70% of your portfolio, with balance 30% in debt. In a medium-risk scenario, this ratio could be 50:50. Hence, don’t blindly copy other peoples’ investments. They may be right for them, but not necessarily for you too.

Preparing your own specific and personal financial menu is, therefore, a must.


Step 3
Learn how to cook
EQUIP YOURSELF WITH RIGHT KNOWLEDGE

Ok, you have decided your menu. But do you know how to cook? You would agree that it would be a ‘mess’, if you make your dish without knowing the recipe or having the right ingredients.

Same thing applies to money too. There are very few millionaires despite good incomes. Mis-selling is rampant. Frauds are common. These clearly indicate limited awareness about financial matters. Obviously, therefore, you must learn how to manage money. Surely, you don’t want to end up in a ‘financial mess’!

Step 4
Buy good ingredients
BUY HIGH QUALITY ASSETS

Surely you cannot make a good dish from rotten inputs. Howsoever good a cook you may be, you need fresh ingredients. Spoilt items will only give you a ‘spoilt’ dish.

Similarly, bad quality assets won’t make you rich. Bad shares will lose money. Bad insurance will not provide adequate cover. Bad property may not appreciate. In short, you are going to lose money with inferior financial products.

Surely you cannot remain healthy eating only junk food. Nutritious food is essential for your (and your family’s) health. An occasional junk meal may be ok. But in the long run eating high nutritional value food is a must.

Likewise, you cannot become rich by investing in junk products. Good products are essential for your (and your family’s) financial health. An occasional bad product may not hurt. But only a high-yield portfolio will create long-term wealth.

Step 5
Don’t overpay for your ingredients
KEEP A TIGHT REIN ON COSTS

Ideally you must buy the best possible ingredients at least possible prices. Sure, you must maintain a balance between quality and price. Unless the quality is significantly better, it may not be worth paying extra. Why shell out more just for attractive packaging? Conversely, buying only the cheapest items may not always be good. These could be of sub-standard quality, which could spoil your dishes (and upset your stomach too).

Same applies to your financial ingredients too — don’t overpay. For example, buying a combination of term plan + PPF would be more economical than an endowment policy. Again, the cost vs. quality balance is crucial. A particular broker may charge more but give better advice than someone inexpensive but failing to provide quality recommendations.

Step 6
Throw away rotten ingredients
WEED OUT THE UNDERPERFORMERS

Food gets spoilt from time to time. Your vegetables may rot; bread may become mouldy; or pests may infect your cereals / grains. If you do not remove these stale items promptly, you will spoil the remaining good portion also.

Likewise, your assets may also turn bad. Some companies may perform badly and your investment may depreciate. Changes in taxation may make some investments unviable. Some thematic funds may no longer remain market favourites. As a result, you may suffer outright losses or at best earn poor returns.

Therefore, you must regularly throw out your failed/underperforming assets.

Step 7
Use the right proportion of  ingredients
JUDICIOUS ASSET ALLOCATION

Right proportion of the ingredients is essential; else you may get a distasteful dish. Even a simple thing like salt makes a big difference. You need just a pinch of salt in your dish. But put just a little more (or a little less) and you can feel the difference.

Further, your diet should have variety. Your body needs carbohydrates (for energy), proteins (for building the body) and vitamins (for body systems to function optimally). Since different food items give different inputs, your diet must include rice/wheat (for carbohydrates); meat/eggs (for proteins); and vegetables/fruits (for vitamins). If any item is missing, your body will suffer some deficiency.

Thus, right proportion and right variety is necessary for your healthy well-being.

Same with your investment portfolio — you need a combination of liquidity (from bank balance); safe & regular returns (from fixed deposits); and growth (from equity/property).

Thus, both diversity and appropriate asset allocation is necessary for your financial well-being.

Step 8
Give adequate cooking time
LET THE INVESTMENTS MATURE

What will happen if you boil meat for a few minutes only? It will remain half-cooked. To make it palatable you have to boil it for 30-45 minutes. On the contrary your potatoes will be done much sooner.

You must cook food for the required time, else it will remain raw.

Same holds true for your investments too. In fixed deposits your interest will start from day one. But if you desire to make money in equity in a few days/months, your expectations are misplaced.

You must remain invested for sufficient time, else it will not grow.

Step 9
Eat and relish
CELEBRATE YOUR MONEY

Finally, cooking is over and all your delicious dishes are ready. Now you can relish them. All your efforts have paid off. All the hunger you had endured until now is about to be satiated. Great!

Similarly, once your millions are made, you can start savouring your money. All your discipline has paid off. Having achieved financial independence, you are free to fulfil all your desires. Again, great!

Step 10
Change with time
REBALANCE YOUR PORTFOLIO REGULARLY

When you are young and your body is growing, you need more proteins to help that growth. But when fully grown-up, the requirement for proteins goes down.

When you are young and your wealth needs growth, equity and property will help. But as you achieve your wealth targets your need for growth reduces and you can switch to debt products.

When you are young, your body resistance is high. Your body systems are robust. Thus, you can take risk with your food habits. But as you grow older, you need to be careful about what you eat, when you eat and where you eat.

When you are young, your risk appetite is high. Your financial system is robust enough to withstand shocks. Thus, you can take higher risks with your wealth creation. But as you near retirement, your risk appetite reduces. Thus, you have to rebalance your portfolio.


 This is an excerpt from my book ‘Millionaires don’t eat cakes…they make them’.

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