Financing Guidance for Beginners |
I know you are afraid of finance because frankly, we can never have enough money!
Plus, numbers are boring and complicated… which is why I am here!
You work so hard to make your family financially secure and I think you deserve to have enough money to fulfill your dreams.
Be it World Tour, Higher Education, or a Retirement Home near a beach! And all of this can happen by choosing the right investment according to your age.
I hope you are as excited to know about Investing For Beginners as I am because in today’s article we are going to see.
Funding For Beginners
1) 3 factors to consider before you chose an investment option.
2) Top 4 Asset Classes or Investment Categories.
3) How to choose the best investment option according to your age.
And towards the end, I’ll give you a Bonus Tip so that when you get old, you don’t become as miserable as that uncle in your society who always complains.
But before we begin this investment class, if you like my work make sure you hit that ‘like’ button because it motivates me to make more videos.
Before you pick an investment option according to your age, here are 3 things that you must keep in mind.
- Inflation For example, let’s assume you keep Rs.100/- in your locker today, then tomorrow that Rs.100/- in your locker will become Rs. 95/- because of inflation.
Inflation reduces the ‘purchasing power’ of money because prices of flour, pulses, clothes, real-estate keep on increasing.
But your cash does not increase. In Jan 2020, the inflation rate in India was 7.59%. So dreams come later, if you first want to keep receiving food and clothing then you have to beat this inflation.
- Retirement Planning One day you will get old and that day you will need more money for medicines and operations, cost of living will increase and to make things worse, you won’t have any monthly income.
Unfortunately, people start retirement planning after getting retired. And for some, their retirement planning is their children. That’s like the worst plan ever.
After working for 40+ years, don’t you deserve to be free? Financially independent? So factor #2 to always keep in mind is your retirement fund.
- Dreams/Goals This is where you and I are different and you and your brother and sister are different because all of us have different goals in life.
Some want higher education, some want to travel, others want to start a business. And all of us want our ‘Apna-ghar’. So your goals will decide what is the best investment option for you.
Now, keeping these 3 factors in mind let’s see what are the top 4 investment categories in the market.
So, most of the investment options can be classified into these top 4 asset classes.
Cash is money in your hands or in your Savings Account. Low risk, very less returns. In SBI, savings account returns are just 3.25% which is not enough to beat inflation, forget retirement or dreams.
But it is good to have a certain percentage of your savings as cash because it is readily available.
We have Bonds, Debentures but the most common debt investments in India are through FDs or RDs. SBI’s FD returns are between 5% to 7%. But they come with constraints like lock-in period, missed installment penalties. While it is good to have a certain percentage in FD for stability, it’s not wise to invest all of your money in this category.
I took a loan and bought a house because I am emotionally attached to the concept of ‘Apna-Ghar’.
But beyond one house where you live, I don’t prefer real-estate as an investment because of 3 reasons. Returns are location-specific, to maintain it you have to pay taxes/renovations and liquidity is low because taking out your money takes a year or more.
So unless you are living there, you must decide whether it is worth the trouble or not. And finally, we have equity.
People who want to beat inflation, save for retirement, and grow their wealth invest in equities either through Mutual Funds or Stock Market. But as you witnessed in the last few weeks, markets are volatile.
So after investing, it is advised to wait for at least 3-6 years to see their potential because equities are long-term investments.
In my opinion, the 2 easiest ways of investing in equity are
- Index Funds because you pay the least expense ratio to a fund-manager but are still tied to the growth of the economy.
- Small case
What is a small case? If you want to invest in the stock market directly but think it is too risky to invest in one company then you can check out small cases.
They create a basket of stocks based on a certain theme like ‘Rising Rural Demand’, ‘Smart Cities’, ‘Electric Mobility’ etc.. So instead of risking it all on one company, a small case allows you to diversify across multiple sectors and market caps.
I know it sounds interesting. So don’t worry, I’ll tell you more about it later.
But for now, remember these 4 asset categories because, in the next segment, we are going to see how you can divide your investments in these 4 categories depending on your age.
Before I begin, know that there are no one-size-fits-all. Please feel free to modify the percentage of division that I am suggesting depending on your risk-taking capability.
With that understanding, let’s start with your 20s.
Assuming that your monthly expenditure is ‘E’ and your age is ‘x’, then your split can be like this.. Keep 2E, i.e at least 2-4 months of your expenditure as Cash or in your Savings Account. For equity percentage, let me give you a formula.
It is generally advised that you invest 100-x% in equity where ‘x’ is your age. Suppose your age is 25.
Then you can put 100-25% = 75% of your savings in Equity. Your equity options are Mutual Funds, investing directly in the Stock Market, or through the small cases.
But remember, choose each equity investment based on a long-term goal like higher education, retirement, corpus for buying a house later, etc.. After you’ve invested in 100-x% in equity, invest the rest i.e x% in Debt for stability.
You can choose FDs or even Liquid Funds that can act as your Emergency Fund for a rainy day. With age, your risk-taking capacity decreases and this formula ensure that as you keep getting older, you start shifting from equity to debt.
This is why the 20s are considered a great age to invest in equity because even though you have less money, you have the advantage of time.
Coming to your 30s. As you grow older, your responsibilities increase. Assuming you will be married and plan to have children, I am not saying you should but in case you do then you need to plan for children’s education for sure but also plan to enjoy your breaks with your spouse by taking holidays or occasional international travels.
Unfortunately, post-marriage couples immediately take home loans, car loans, personal loans, and for a long time keep servicing these loans.
But it’s always better to first save and build a decent corpus which is why the split is.. 100-x% for equity. Even if you’ve missed investing in your 20s, 30s are still a good time to start a SIP. Debt is still x%.
But since you are investing more in debt in your 30s, plan to do short-term investments in Liquid Funds for vacations or to build a corpus before you take a home loan.
Now, 40s is a good time because of the salaries of both husband and wife increase. At this time it is important to keep a check on your expenses and invest the additional salary by topping up your SIPs from time to time to meet your goals faster.
So, equity can be between 50 to 60% after doing that 100-x% calculation. If you’ve not invested any amount in equity till now then it is time to get serious and talk to a Financial Advisor immediately.
Retirement savings should be your priority but also plan for children’s education, supporting parents, etc.. And stay away from schemes that sound too good to be true because more often than not, they have high risk associated with them. Coming to Debt… At least 3 to 7 months of your salary should be saved as Emergency Fund because the more responsibilities you have, the more stability you need. Btw, here’s a Pro Tip. In your 30s or 40s.. you have a family to take care of.
So, investing in a life insurance policy at this time is a wise decision. But at all ages, you must have a health insurance policy because in case of an emergency or an accident, health insurance saves you from loans and when you don’t have loans will you have any money to put in the rest of the investments.
Coming to 50 and beyond. I am sure your parents fall into this category. So you can show them this video, talk to them and you can help them plan their investments by doing this. Equity: 20 to 40% Even if you invest in equity, pick large-cap companies that have less risk or choose the ‘All-Weather Investing’ small case.
I’ll show you what it is in a minute. Now in Debt, at least have 6 to 12 months of your salary as Emergency Fund at this age.
So, as you just saw.. when you start your career you have more appetite for taking risks, and slowly as you reach retirement.. you will have no monthly income and less risk appetite. So it is important that you are prepared for this transition.
As I mentioned earlier, equities help you generate long term wealth and hence prepare you for retirement and beat inflation. But it is important that you don’t lose money in equity due to greed, fear, or lack of knowledge.
And one thing that can help you with that is a small case. This video is bought to you by them because single stocks can be risky but small case helps you diversify your equity investment across multiple sectors and market caps.
This is how it works. You can log in to a small case through one of these stockbrokers. I’ll log in using my Zerodha credentials and after logging in, I can explore and chose to buy an entire portfolio of stocks.
As you can see, there are different themes and you can choose the theme that you like the most.
For example: if you think that electric vehicles will do well in the future then you can check out the Electric Mobility small case.
If you think because of the current condition, the Pharma Industry will do good then you can check out the Pharma tracker.
Let’s assume that I want to invest in the low-risk small case called ‘All-Weather Investing’. For each small case, you can see, how much percentage is being split among which companies or segments.
Now when you click on ‘Buy’, you can either buy it as a one-time investment or apply for a monthly SIP. Remember, a small case has professionals who just create a basket of stocks for you.
Ultimately, you will buy these stocks through your Stock Broker. So, to buy a small case you need to do these 2 things:
Step 1 is to open a DEMAT account with a stockbroker. I am using Zerodha because it doesn’t charge any brokerage for equity investment.
So if you also want to open an account with Zerodha then I’ve got a sweet deal for you. If you use the link in the description to open your account then you will receive these 7+ Trading and Investment courses for free.
Step 2 is simple. After getting your Zerodha login details, you can use the same to login to a small case using the link below and buy any small case that you like.
Remember, a small case (through Zerodha) has transaction charges of between Rs. 50/- to Rs. 100/- which is frankly very less when compared to the brokerage charges you’ll have to pay otherwise.
But always remember, equities investment is subject to market risk. So, always research the companies before you invest.
But there is one investment that is zero risks with maximum returns and that is to ‘subscribe’ to my channel and hit that ‘bell’ icon because I make Career and Finance videos, especially for you.
I think today’s article was a little heavy-duty.
But please don’t worry if you haven’t started any investments!
As a Chinese proverb says (oh the irony!) …
The best time to plant a tree was 20 years ago and the second-best time is NOW. It’s exactly the same with investments.
So today’s Bonus Tip is this… ‘Start Learning Now!’
Talk to people, read more, learn more.
Comment below and ask your questions! It is going to make an effort to ‘learn’ about investments but I promise, the benefits are going to be worth it.
Now before I leave, a quick reminder. If you think Zerodha and small case are the right options for you then don’t forget to use the first link to open your Zerodha account to get your free courses and then use the second link to buy a small case. I promise to see you again in the next post, until then. Keep fighting,