How To Be Poor
Lesson 1: Don't Save and Invest
The importance of saving money is well understood by most. After all, at an early age we learned that "a penny saved is a penny earned".
People have different reasons for not starting to save. The younger ones tend to live in the moment the older ones feel they're doing just fine. The underlying belief common to all is, "As I start to earn more, I will automatically be able to save more". Most People having save more but they don't invest. Perhaps, they could not understand and differentiate between saving and investing.
Lesson 2: Don't Buy Equity
Let's say you want to get from Delhi to New York. You could do this journey in a number of ways – you could take a boat, go by air or maybe even use a combination of walking & swimming. Now chances are that you will take a flight? Why? Because it takes much less time. The same principle should govern your investment behaviour.
Investment alternatives are just like transportation alternatives. They're a means to an end. They get you from one place to another at different speeds.
Now why would you want your investments to grow at 4% or even 8%, when a 15% return is possible? As you would have imagined an investment growing at 15% per annum will help you achieve your goals much faster.
Lesson 3: Think Big to start
9/10 people in their 20s don't invest because 'why invest such small amounts, what good will it do?' 'I will start investing when I have more money'. While this may seem a fair point; one couldn't be further from the truth. Why do we say so? There are two reasons. Let's start with the issue of compounding itself.
Small Amounts can make a Huge Impact
Even small amounts if invested for a long time can snowball into a large number. A 25 year old is able to invest for approximately 35 years (till the age of 60). Investing just Rs.1 every month say @ 15% p.a returns on annual compounding basis, this would become Rs. 10,600 approx.
What if this individual could invest Rs. 10 per month? He would have Rs. 1,06,000 approx. at the end of 35 years. What about Rs. 1,000 per month? The answer is nearly Rs. 1,06,00,000. This is the magic of compounding!
And what it would be if the individual could invest Rs. 10,000 per month..........
Don't wait for your salary to increase
"I can at best save 4000 rupees. What good will that do? Why don't I wait till I can save say, 10,000 rupees, that's when I'll start investing!" This is the well reasoned excuse most people in their 20s & 30s give when asked why they're not investing. The numbers are different for all, but the underlying thought is the same.
Numbers prove otherwise.