INVESTING is not rocket science…

In last article we talked about why Investing is superior to Saving. We concluded, investing helps us save enough for future without sacrificing too much in present.

So, how to go about investing??

Investing = Saving money with a plan

Now you must be thinking – I am not a CA, CS, finance graduate or money expert! I haven’t studied about money at college, how can I plan money without a background?

Through my articles I will explain to you the money planning process. We will try to understand each topic in very simple terms without any jargon. Do let me know if you would like me to make some audios or videos to help.

What is planning money?

Planning your money is similar to a plan to buy a four-wheeler. Let’s try to understand with an example –

So, what are the questions that you would ask yourself while trying to buy a four-wheeler or a car?

Once you can answer all these questions you can be sure of buying the most suitable car for yourself or your family. Similarly, when you know the right questions to ask yourself on your money related needs/ goals you can definitely get to a reasonable plan.

When you have to plan money – ask relevant questions about every aspect of your life that involves money. For that you need to understand the major parts of your life that need dealing with money and hence need to be questioned.

Look at the picture and read the questions in it.

Do these questions make you uneasy (concern you)?

Don’t get scared by so many questions. It seems like a chaos tough to control but it isn’t!

By making a financial plan once you can control this chaos!

Is it so easy – yes, it is indeed!

These questions are just to make you aware of the different areas a financial plan can address.

How to ask questions relevant to you?

You answer lies in the questions that make you uncomfortable!

You will first need to understand the different terms in the figure above. Next step would be knowing how to use them to make good investments. We will try to divide the task into several small parts so that you can understand and use it.

In this article you just have to try and understand the terms and ask any questions you have in comments. The use of these terms in a financial plan would be explained in part two of this article.

Cash flows – The simple inflow and outflow of cash in your household. This would be the easiest information to gather. You just need to write down your monthly expenses classify them under different heads. E.g. – Salary, household expenses (Necessary – rent/ mortgage, grocery, utility bills; Discretionary expenses – movies, eat outs, non-essential clothing)

Major Purchases – There are the purchases that would cost more than half of your monthly income. E.g. – buying a smart TV, laptop, smartphone, domestic/ overseas vacations. These should also be planned carefully as they have major impact on your monthly household expenses if not planned at all.

Asset allocation – This is the division of your salary between your household expenses and investments. If you are spending all you earn on your day to day expenses, you won’t be left with any reserves to use when you retire. At minimum you require money to meet your living expenses after retirement.

Net worth – The true value of your assets i.e. value of your house minus the loan you owe for that house. Value of your investments minus personal credit card loan you owe.

Insurance / emergency reserve – Emergency reserve is the money kept aside for incidents like sudden job loss of the prime earning member of house. Insurance is a cost to cover very big risks at reasonable low costs, e.g. ca insurance, term insurance, health insurance.

Education / marriage funding – Funds required at a specific time for either education or marriage related expenses. E.g. Aditi would need INR 10 lakh for her daughter’s graduation college fees in 2025.

Retirement expenses – The money required to fund your living expenses (Necessary – rent/ mortgage, grocery, utility bills) after retirement. Funding all your necessary expenses is what you should target at-least.

Estate planning – Some people may want to leave some inheritance for their kids or some charitable institution.

Wasn’t that easy to understand? And you don’t need any prior background in finance to understand this series of articles on managing personal finances.

These are the most important factors driving your investment plans. You now need to just understand how you can make your ‘investment plan’ using the information you gather through these questions.

But before you go towards making an investment plan, its a must to know plug the holes in your current money habits. In next few articles you will be introduced to some of the common mistakes we all make and that have big impact on our investments. These are easily avoidable mistakes and can greatly contribute towards your investments fetching better returns.

Please let me know in comments if you are able to understand these articles. If they are a little tough to understand, do let me know if videos would help!

#Investing