Personal Finance - Lessons Learnt Late, Too Late, Hopefully Not Too Too Late

Lately, I have been reading about Personal Finance a lot. A lot. My quest started somewhere in April'20 when my brother created a Zerodha account for me. Till then, at 34, I had little knowledge of stock markets. I didn’t know much about the financial instruments that around in the world. Heck, I had learned how credit cards work (and got my first one) only at the age of 32. No wonder, I was an empty cup waiting to be filled with the wisdom of creating wealth and, as importantly, growing it. 

Interestingly, what I found along the way was that most people who have been interested in money matters and working towards multiplying it for a long time, even they are unaware of some of the common mistakes and the fundamental principles. That was shocking. At first. Eventually, I realised, in money as in other matters, people learn culturally, seeing what others do, thinking the way others think. They create their own theories. They select the stories that confirm to their narratives. Rarely, do they (and ‘they’ includes me) cross-check it against statistics, with scientifically collected data, with patterns observed and ratified by experts. 

So I thought of sharing some of the nuggets of wisdom from the books I have read recently. They can be true or false. Obvious or counter-intuitive. They are, in most cases though, backed by research. Feel free to opine and share your thoughts. 

Lesson 1 - Three levers for creating wealth:

• Cost Reduction: Reducing the existing costs
• Cost Avoidance: Avoiding future costs
• Additional Revenue: Increasing your income/revenue

Every method of wealth creation falls within one of these 3 levers.

Lesson 2 - INVEST

*Unleash the power of compound interest by investing your money. Cash loses its value with time

Lesson 3: Plant Seeds 

*Give away some money to a cause you believe in. This will help you not be self-centric. And be grateful in your pursuit of wealth when you realise you already have a lot to begin with. 

Lesson 4: INVEST Intelligently

• Create a fail-safe investment portfolio by using 4 instruments: 1. Equity 2. Gold 3. Bonds 4. Cash
• Understand the relationship between the instruments: when one depreciates, others might grow 
• A Balanced Portfolio: 25% in each of these instruments has worked historically. 
• If you are young though, you might want to have ~70% of your investment in Equity. 

Lesson 5: Invest for Long Term

• Warren Buffet Principle: If what you invest cannot be traded for the next 10 years - it is just locked and no matter what happens you can’t trade it - where will you out your money?

Lesson 6: INVEST Passively 

* Indexing > = Stock Picking

* Index Funds > = Mutual Funds

Lesson 7: Create an emergency fund 

• You can set your own goals depending on your life situation 
• This amount is to be tinkered with only during self-certified emergencies 
• Don't worry about interest accrued on this amount. Make sure it is liquid and readily available.

Lesson 8: Make investing automatic as much as possible

This is the (hidden) cost of active trading:

• Mental Peace
• Mindspace Occupancy
• Physical energy 

Lesson 9: Index wins.

• For diversity, you can invest in indices of other nations (S&P 500, for instance, besides Sensex) 

Lesson 10: Develop Power over Purchase 

• Feel free to walk away in a store 
• Save now to purchase later

Lesson 11: Avoid Stuffitis: the I-don’t-have myth

• You can easily do without (most) stuff

Lesson 12: Live substantially below your income

• What you spend on, depreciates. What you invest on, grows. 

Lesson 13: Debt is bad

• You become a slave to loan provider
• It takes away mental peace
• Creates obligations    

 

Lesson 14: Invest in (government) schemes where tax can be avoided

* As an investor, it is good to know where you are paying taxes, how much and what are the ways encouraged through which those taxes can be avoided 

Lesson 15: Don’t invest in something you don’t fully understand 

• Don’t understand Options? Don’t invest until you do. Don’t understand how Real Estate works? Don’t invest until you do. 

Lesson 16: Efficient Market Hypothesis - why Passive > Active investing

• Stock markets will have corrections in due time and come to the right price

Lesson 17: Nobody knows what’s going on - why Passive > Active investing

• Macroeconomic factors affecting indices cannot be controlled, measured or foreseen

Lesson 18: Exchange Trade Funds ~ Index Mutual funds: not a bad instrument 

*ETFs are subject to your own eccentricities and inconsistencies since you buy and sell them like stocks

Lesson 19: KISS: Keep it simple, stupid

• Make it systematic and automatic 
• Free up your mind

Lesson 20: Respect your money

• It’s the source of your (financial) freedom
• It’s can get you more comfort, convenience, power, prosperity, happiness, and peace. 

Lesson 21: Investing is about:

• Beating inflation 
• Saving money for an uncertain future
• Make it grow through the power of compounding 
• Keeping it safe from your hands - from impulsive and rash decisions

Lesson 22: The best way to get wealthier is to Increase your Additional Revenue and then save it

* Multiple income streams is powerful - it gives you choices you never had before

Lesson 23: Discipline and Accountability 

• Honour your written financial plan, your goal, your strategy 
• As in cricket - rashness can lead to throwing away your wicket

Lesson 24: Never buy what you don’t need

• It’s not about occasional decisions - it s about habit, code of conduct, a way of life