How to invest your money wisely [infographic]

Are you a new beginner to investing and wanting to understand how to invest your money wisely in India or anywhere in the world ? Or is it that you have put your neck deep into the underbelly of the stock markets, have burned your fingers and are looking to start afresh ?

Whatever be the case, wise investing is something which can turn any amateur investor into a successful one. So while the big mouthed people talk about making a killing on the stock market and real estate, you can sit on the sidelines and listen and laugh, because you know that they are going to have their page 3 of recognition only till the boom lasts but when the tide turns, only then will the world know who is swimming naked (heard that somewhere before !). If you are a wise investor, you will have the last laugh.

Here is how. Read the below detailed guide on how to invest your money wisely – this is more than handful in these times of economic distress when from 2008 – 2013 the returns from all investment classes have been pathetic, when India’s GDP has just been predicted to grow below 5% and the rupee has wet the roof in-spite of so many diapers on it.

How to invest your money wisely anywhere in the world

Use rules of thumb to start

First things first, your knowledge on personal finance is going to take a while to become top notch so don’t aim for perfection to start with, aim for progress. Start with thumb-rules on what to do with your income. Many financial planners might rubbish this but remember progress is your aim, not perfection at the moment. Use these personal finance rules of thumb to distributing your income wisely between spending and saving.

Remember it is easier said than done, but saving early on in life is very very tough when you have just got out of college and you want to spend on those beautiful things in life that you planned while you burned the midnight oil. But saving money early in your life matters. If you understand and adsorb this in your mind, half the battle is already won. Start with the thumbrules.

Avoid bad debt

Don’t get carried away and run into bad debt. So if you love credit cards and personal loans, it would be better if you love anything else except these. Both have been the single most reason for early savers to go down the drain. A huge debt will leave little money for you to save. And if you are paying the minimum on your credit card, God bless you. You need to avoid credit card debts and say no to personal loans.

But the cause of bad debt is really the failure of investors, new or old, to differentiate between needs and wants. And discretionary and non discretionary expenses. Of all the clients that I have had, controlling expenses has been the biggest challenge always. Including mine ! You can become an expert on how to invest your money wisely but if you rake up bad loans, you will be anything but wise.

Plan where you will spend your money

I am of the firm belief that 99% of Indian households do not do budgeting. If you do not know what to track against, how will you ever control it ? What will be your benchmark ? So the first logical step is to assess your financial situation (and remember if you are a beginner you do not know what to assess !) and follow that up with budgeting. This is one of the most basic and often missed steps in financial planning – master this and you would have taken a significant step to know how to invest your money wisely.

Budgeting is simply telling yourself that you are planning to spend your money for the next 1 year into some categories as below :

1. Transportation (Auto EMI, Fuel, Cabs, Maintenance)
2. Home (Groceries, Rent,Furniture, Maintenance, Misc Supplies)
3. Utilities (Gas, Phone, Internet, Cable TV, Electricity etc)
4. Heath (Doctor’s fees, Medicines etc)
5. Entertainment (Eating out, movies, hobbies, music, vacation)
6. Others (Gifts, Clothes, Donations)

Then you track your actuals and see how you did against what you had planned earlier and make amends.

Also, remember to save first, spend later. This is one of my favorites. Most of investors do it the other way round, they spend first and save whatever is left. However, the opposite is what should actually happen. That way, you will always end up spending on items you necessarily need and in the process save as well.

Understand how much risk you can take

Understanding how much risk you can take now is one of the most important step in understanding how to invest your money wisely. Risk depends on a lot of factors. Your age, where you work, how many people are dependent on you for their livelihood and what are the liabilities you have are some of the parameters.

Your asset allocation is the holy grail to your investment philosophy and understanding how much risk you can take in life is a key part to that. Stick to your asset allocation and your risk matrix at all times. You will be safe than sorry.

List down your financial goals

Write down what you want o achieve in life in black and white. It’s pretty simple – put the most important ones at the top and the least important ones at the bottom. Also put the current value of those financial goals. Then, using inflation adjusted value, extrapolate those figures to a future cost. Now all you need to calculate is how much money you need to save each month for these goals.

Check whether you are saving enough money from your income for this purpose. If yes, all you then need to aim for is to find out where to invest the money. If not, time to rework your maths on your expenses to ensure you can save enough. Or maybe you can contact a qualified investment advisor or financial planner to give you formal advice. Check out the goal based investing article for a detailed way of saving for goals.

Diversify

When you invest, remember that you cannot use only one investment class to make your money grow. There are many investment avenues in India and you need to have a healthy mix of them. There are some that are better qualified as weapons of mass destruction, like options and futures while there are some that are simply the  best, like term insurance.

You need to have a healthy mix of assets  in your portfolio. Remember never to buy a product because of the returns it generates – buy a product if you have tied it to a goal in your life. Also, never get married to what you buy. Learn to let go of the ones that are adding no value in your portfolio. Remember not to churn your portfolio too much.

Insurance is not investment

I did write about this earlier but to repeat the age old wisdom, insurance is meant for protection. Use it for just that. It is not an asset class from which you should expect returns. If you want to learn how to invest your money wisely in India or elsewhere in the world, remember that the only insurance policies you should ever need are term insurance to protect your life; health insurance to reimburse your hospitalization expenses; personal accident insurance to cover disability and loss of income; home and auto insurance to protect your house and the vehicle you drive and critical illness to cover huge spends during critical illnesses.

The rest all namely endowment plans, money back plans, unit linked insurance plans are best left untouched.

Get a contingency fund

This is like loose change you keep to fill the air in your car’s tyres. If you don’t have the change, you will probably be breaking (for lack of a better word) a 100 rupee note for a 5 rupee spend. Likewise, emergencies come unannounced and when it happens, you should not need to pull out money from your corpus as that will jeopardize your future goals. Having an emergency fund with say 3-6 months of money in liquid funds works like a charm. Dip into it whenever you need it.

Keep an emergency fund and hope never to use it.

Here is another good article on how to invest your money wisely.

Consider inflation and taxes

Inflation and taxes are the wildest beasts around. With salaries not rising since 2008 in India, the high inflation has really hurt investors, especially the middle class. It is no surprise that one if forced to think how to counter inflation and almost always it is reducing your spends. No, I don’t agree that you can feed your tummy for Rs 5 !

Taxes are another thing that eat away your money – I am sure you would not have a problem with that as long as you can see all round development but there is got to be some method to this madness of all round scams in this country. Meanwhile, all investors can do in make sure they invest so that the tax benefits that are available can be used beneficially.

Remember to cater to both inflation and tax adjusted values in your calculations while doing your planning.

Save for your retirement

Indians are living  beyond 80s which is both good news and bad. The good news is that you will be around to see your grand children blow away your money and the bad news is that you will need to save a whole lot to live without begging around. So save a lot !

Know how much money you need to retire so that you are aware of what it takes to keep this as a top priority goal in your life. Remember that children’s basic education and marriage are non negotiable goals but you need to draw a line on how much you will spend on your kids so as not to cause you an embarrassment in your hey days.

Last word

So that’s it, time for you to enjoy your infographic. Let me know if you want anything added and I will happily do so. I hope you enjoyed reading this and are better off on your understanding on how to invest your money wisely. I enjoyed writing so let me know via comments what you learnt.