sammie2019
New member
Level zero means no idea about bank accounts, some idea about FD, something heard about SIP and that is it.
Otherwise, the person is a well-earning professional, protected by parents (who are also likely to have not so great ideas about money management, otherwise they would have educated him. The ideas of ‘buy your house first’, ‘real estate is the best investment’, ‘FDs are the best, particularly when you buy them in your parents’ name because it saves tax’, ‘gold is best’, etc.).
So, let’s start with the most basic question. Why do you earn money? Why have you studies so much (12+3+2 or 12+4+/-2, I have added MBA level to a graduate or engg graduate). In short, 17-18 years of studies. Plus add 2/3 years of working. And yet, there are not equal minutes to have real read and understand how to manage all that money that is being earned and will be earned.
We earn money as professionals, because that is what we have been trained to do by our parents, peers, society, etc. That is what has been passively shaped by everyone around us, but not really by us internally. So, they give us ideas about how to get a good earning career, how to have a good CV to get to a good company, how to shape our personality, etc. And then how to save or invest, etc. Everything passive, bombarded by messages from all around us. The result is if someone asks us anything about it, we even feel proud that we don’t know anything about money management.
Secondly, since we don’t know anything about it, and when we are starting to really dip our toes in this vast ocean of information about money management, it is scary. It becomes, since I don’t know what to do, I will do nothing. I will keep kicking the can of doing something down the road, till either someone comes and shows me carrots and gets me to put my money somewhere and be done with it or more kicking or I see one of my friends who is financially savvy to get expensive things (car, house, vacation, whatever). Till this time, the money earned remains in the salary account (personally, I have seen 6 years worth of earnings in the savings account – amount 24L).
“If you want to buy things you want, you have to save”. This was my first lesson in savings and investment, after I had studied and worked for a total of 22 years!
In this writeup, I will just be writing about someone who has got some amount but don’t know how to start managing it. Rather than someone who is about to start.
Bank Account: The earned money is sitting in the savings account and earning a measly 3.5% (tax free up to 10-15,000 – whatever govt has limited, as such the amount is small). However, the money is relatively safe. Relatively, because in today’s world of online banking and debit cards, the risk is non-zero.
So where to start?
Let us first understand some basics:
Savings Options are FD/RD (sorry didn't realize RD=recurring deposit), NSC (national savings certificate), PPF (public provident fund), private companies FD (like Shriram finance, and others) and mutual funds categories which deal with savings papers (also known as debt papers).
All these are called Debt instruments. Basically, you give your money (called principal amount) to the other party (govt, bank, private company), and they promise to give a certain percentage of returns over and above the principal amount. So, you give them P (principal) and then give back P + I (principal and interest) after a period of time.
An example of FD: you give the bank 10,000 today. And the bank promises to give you 10,000 and 7% (700) after 1 year.
An example of RD: you give the bank 1,000 every month, and the bank promises to give you 12,000 (1,000 x 12 months) and around 400 additionally as interest. Only back of the envelop calculation.
Moreover, you have to pay income tax on those 700 and 400 rs. So, just really understand how difficult it is to earn money on the savings amounts and which when subjected to tax, comes out to how little. In this case, if you are in 30% bracket, then you are getting only 490 and 280 rs finally, after you have saved that amount of money for 1 year.
The corollary is since you have not been investing at all, you are not even getting that amount till now. Not even those measly 490 and 280 even all these years.
I will just cut short the other options, because they are as pathetic for someone of your condition.
The “best” option right now to move that money out of the rut is to put majority of money into a liquid mutual fund.
Why that thing? Because they are:
· Diversified – basically, they keep money into a large number of different areas, so that if one area goes bad (recent news IL&FS), then all your money is not in jeopardy. The more diversified the money is kept, better is the protection (a general rule).
· In general, you earn more than FD, both in terms of interest as well as with less tax, if you keep the money in there for >3 years.
· Third and most important, the money withdrawal is flexible. You want to remove 5,000 you can. You want to remove 1 lakh, you can (of course, you should have more than 1 lakh invested). You want to remove everything, you can.
· Negative thing: you will receive money only the next day if the amount of big. For smaller amounts (
Otherwise, the person is a well-earning professional, protected by parents (who are also likely to have not so great ideas about money management, otherwise they would have educated him. The ideas of ‘buy your house first’, ‘real estate is the best investment’, ‘FDs are the best, particularly when you buy them in your parents’ name because it saves tax’, ‘gold is best’, etc.).
So, let’s start with the most basic question. Why do you earn money? Why have you studies so much (12+3+2 or 12+4+/-2, I have added MBA level to a graduate or engg graduate). In short, 17-18 years of studies. Plus add 2/3 years of working. And yet, there are not equal minutes to have real read and understand how to manage all that money that is being earned and will be earned.
We earn money as professionals, because that is what we have been trained to do by our parents, peers, society, etc. That is what has been passively shaped by everyone around us, but not really by us internally. So, they give us ideas about how to get a good earning career, how to have a good CV to get to a good company, how to shape our personality, etc. And then how to save or invest, etc. Everything passive, bombarded by messages from all around us. The result is if someone asks us anything about it, we even feel proud that we don’t know anything about money management.
Secondly, since we don’t know anything about it, and when we are starting to really dip our toes in this vast ocean of information about money management, it is scary. It becomes, since I don’t know what to do, I will do nothing. I will keep kicking the can of doing something down the road, till either someone comes and shows me carrots and gets me to put my money somewhere and be done with it or more kicking or I see one of my friends who is financially savvy to get expensive things (car, house, vacation, whatever). Till this time, the money earned remains in the salary account (personally, I have seen 6 years worth of earnings in the savings account – amount 24L).
“If you want to buy things you want, you have to save”. This was my first lesson in savings and investment, after I had studied and worked for a total of 22 years!
In this writeup, I will just be writing about someone who has got some amount but don’t know how to start managing it. Rather than someone who is about to start.
Bank Account: The earned money is sitting in the savings account and earning a measly 3.5% (tax free up to 10-15,000 – whatever govt has limited, as such the amount is small). However, the money is relatively safe. Relatively, because in today’s world of online banking and debit cards, the risk is non-zero.
So where to start?
Let us first understand some basics:
Savings Options are FD/RD (sorry didn't realize RD=recurring deposit), NSC (national savings certificate), PPF (public provident fund), private companies FD (like Shriram finance, and others) and mutual funds categories which deal with savings papers (also known as debt papers).
All these are called Debt instruments. Basically, you give your money (called principal amount) to the other party (govt, bank, private company), and they promise to give a certain percentage of returns over and above the principal amount. So, you give them P (principal) and then give back P + I (principal and interest) after a period of time.
An example of FD: you give the bank 10,000 today. And the bank promises to give you 10,000 and 7% (700) after 1 year.
An example of RD: you give the bank 1,000 every month, and the bank promises to give you 12,000 (1,000 x 12 months) and around 400 additionally as interest. Only back of the envelop calculation.
Moreover, you have to pay income tax on those 700 and 400 rs. So, just really understand how difficult it is to earn money on the savings amounts and which when subjected to tax, comes out to how little. In this case, if you are in 30% bracket, then you are getting only 490 and 280 rs finally, after you have saved that amount of money for 1 year.
The corollary is since you have not been investing at all, you are not even getting that amount till now. Not even those measly 490 and 280 even all these years.
I will just cut short the other options, because they are as pathetic for someone of your condition.
The “best” option right now to move that money out of the rut is to put majority of money into a liquid mutual fund.
Why that thing? Because they are:
· Diversified – basically, they keep money into a large number of different areas, so that if one area goes bad (recent news IL&FS), then all your money is not in jeopardy. The more diversified the money is kept, better is the protection (a general rule).
· In general, you earn more than FD, both in terms of interest as well as with less tax, if you keep the money in there for >3 years.
· Third and most important, the money withdrawal is flexible. You want to remove 5,000 you can. You want to remove 1 lakh, you can (of course, you should have more than 1 lakh invested). You want to remove everything, you can.
· Negative thing: you will receive money only the next day if the amount of big. For smaller amounts (
