What I learnt about “money” in 2020

2020 has been an unprecedented year for all of us. It threw many of us into situations that we had never faced before. I pray for all those, who are facing any such struggles currently and hope that none of us has to face such situations ever again in the future.

For me, this was a year that has made me re-evaluate life’s priorities. It has taught me humility, care, the importance of human connection, fragility, and the value as well as the futility of money. This post is all about the last bit. It talks about all the fundamentals I have learnt in my journey from a person oblivious to finances to a naive person, curious enough to explore.

First thing first, Money in itself is a humongous topic to be covered in a single blog post. To make it easier for me to write, I would start at the crossroad where I found myself. I had been working for 6 years and had saved up a decent bit (none of which was planned, just that my needs and wants had never been extreme). Apart from this, I was fortunate enough to keep my job during the pandemic and thus had a steady income. I obviously received all sorts of advice, loan a flat, put everything into a fixed deposit, invest in mutual funds, crypto, stocks, etc. I was confused and barely had an opinion.

After a year of learning and good and bad investments following are the questions I found some answers to and I hope they help you in some way as well.

Why Invest?

For me, being in my 20s, having a good job, being away from my family, and being responsible only for myself made it really easy to avoid this question. However, the answer to this is really simple because otherwise “You are just losing money”. Let me explain this with an example. Let’s say you have Rs 500/- in your bank account and the movie ticket costs Rs 200/- each, with popcorn worth Rs 50/-. You can easily go on a date and still save 50 bucks for roses. Neat right?

Let's make it a bit more complicated, the price of every commodity continues to increase with time due to what we know as Inflation. So let’s assume the Rate of Inflation is 15% and the interest on your saving account is at 5%.

Now you can do the math, but let me tell you the outcome.
- A year later you can’t buy roses for her with the money you have. But that’s okay you both can still watch the movie and enjoy the popcorn together.
- Another year later, the popcorn would feel a bit out of the budget, but it’s
“Avengers: End Game”, right?
- After one more year, you suddenly can’t afford to go to the movie together. And now time for the magic trick…Pufff…guess who is single again?

Obviously, this is an oversimplification but the gist is that the bare minimum goal of an investment should be to beat inflation otherwise your money is just losing its value.

However, one might still argue that their salaries will increase too. And in fact, they might have more than Rs 500/- in their account to start with. So their love will blossom forever and they are not the ones who want to accumulate wealth. In fact, I thought similarly but then one concept changed my thoughts towards this.

What to Invest For?

While I was still not convinced to put efforts towards investing, I learnt about the concept of Goal-based Investing which completely changed my perspective towards investing.

Goal-based investing suggests investing systematically towards your life goals. These goals can be buying a smartphone 📱, buying a car 🚗, buying your own house 🏠, going on a vacation 🏖️, your wedding 👭, your kid’s education 👩‍🎓, your retirement 👴, and so on. They can be short-term or long-term, small or big but they just need to be realistic and measurable. For e.g, if you want to buy a car 5 years down the lane which currently costs Rs. 10,00,000/- with the inflation rate being 5.25%. You have a goal of owning a car worth Rs. 13,00,000/- 5 years down the lane.

I found that having financial goals help you in these ways.
1. They give you the right motivation to invest.
2. They help you create systematic investment plans towards each of those goals
3. They push you to track your investments and ensure whether your goals are on track.
4. Having a healthy mix of short-term and long-term goals helps you to define your risk appetite. For e.g. you would be okay investing in a high risk-high returns sort of instrument for a long term goal as the time will average out the risk
5. In case you can foresee that you might not be able to meet one or more of your goals then you can re-prioritize your plan basis their importance and urgency.

I recently came across a financial advisory Thrivewealth which also helps people with financial goal planning. I would suggest going through their sample plan to get a gist of Financial Goal Planning. Also, while you might think it’s too early to plan for your retirement and kid’s education/wedding, I would suggest you still consider them as part of your financial goals. It really helped me understand the way expenses grow over one’s life and why having a plan, good or bad can be better than having no plan at all.

When To Invest?

If you have stayed with me till now, I believe at least some of you would be interested in taking the next steps. The immediate question that came to my mind after all the planning was “When to invest? Am I already too late to start?”

The simple answer to the question When to Invest? is “As soon as possible”. This is not a piece of blanket advice, It has a lot of science or rather maths behind it. Let me introduce you to another essential aspect of investing, Compounding.

In very simple words, Compound Interest is the interest earned on money that was itself previously earned as interest. This aspect leads to an exponential money growth behavior when you invest it. By the way, a similar trend works for debt instruments too.

Below is an example of three situations where a person started investing 1 Lakh every year compounded over 8% at ages 20, 30, and 40 and stopped investing after 20 years. Check out the corpus they would have at 60.

So effectively due to compounding, when you start saving may effectively outweigh how much you invested.

And coming to the second part of the question which I had, “Am I too late to start now” is simple again that I may have lost certain opportunity for sure but in the end, it is all about meeting “my” goals right? so it is never too late to start and never too small to start with. This brings us to the next question.

How much to invest?

Probably one of the trickiest questions I faced and in fact, this had also pushed me into an analysis paralysis situation. Following are some steps that worked well for me.

Establish an emergency fund.

Keep a certain amount as part of your savings that can be liquidated really quickly. This has been one of the biggest lessons from the pandemic for me. This amount can be 3–6 times your monthly salary or you can choose any other criteria that better fits your lifestyle and priorities.

Pay off your debts?

This might not be as straightforward as it sounds. I chose to repay my education loan before I started investing and that was more of an ideological choice for me. If I were to do it today, I would have probably compared my education loan interest rate post the 80E tax savings on them against my investment’s expected interest rates and then take a call.

Insure yourself and your family.

I have been the culprit of ignoring this factor for a long time being covered as part of my parent’s insurances as well as covered well enough by my employer. However recently I believe everyone, no matter how young, has become more and more aware of their own mortality and vulnerability. Invest in a good health insurance and life insurance policy for yourself and your family. Look at it as an instrument that takes care of some of your worries and can allow you to keep your investment plans more predictable

Know your expenses.

The final and most important step before investing is to know your expenses. Understanding your major monthly expenses. Apart from planning your investment this will also help you identify your unnecessary expenses and help you cultivate the habit of tracking your expenses as well.

Once you have taken care of all of the above-mentioned points you will know your investment potential. The total amount from which you can save and invest for your future goals

There are various other technical aspects beyond this like where to invest, how to diversify your portfolio, when to withdraw from your investments, and so on. I will park those discussions for some other day as this is definitely going to be an ongoing process. But for now, before you start with your investment I want to talk about something, which I feel is often ignored by many.

Why Invest?

Deja-vu? Didn't we already cover why should one invest, what is exactly in it for me? Then why do we have this again?

Let me put it in this way. Any year would have been a good year to start my investment journey. But there was something special about 2020. This year helped me look at life with a lens that I wouldn’t have otherwise. To add to that, a couple of months back I was reading the book “Die with Zero” by “Bill Perkins”. It looked like a scary title back when it was launched in July 2020. However, it is a simple book that talks about living rich rather than dying rich.

Like money, your life experiences and the returns of the time shared with your loved ones also compound over time. So while optimizing the returns on your investments it is important to realize why you started in the first place. For me, setting up my financial goals helped me get better clarity at this. For e.g. I did not plan for my dream vacation after I retire only to save up a bit more wealth to help me retire. Skiing at 60 might not be the best plan anyway.

So at least my ultimate investment goal is not to die with a lot of money but to experience a bit more fulfilling life.

I hope this helps you start your investment journey. I am also dropping below few resources that I have used to get started with mine.

Edit : 29/11/2022 — List below has changed drastically now. I will be making an update to this post. Hopefully soon.

One thing that I have learned about money is that it’s good to talk about it. So feel free to reach out to me if you want to talk about these things. I would be happy to engage in such a conversation. I can be reached out over linkedin https://bit.ly/34mPJFt

-vh!