The essential piece of advice for growing your wealth.
Ramesh works in the capacity of a manager for an IT company and earns Rs 75,000 each month. He dwells in a 3-BHK rented apartment, which cuts Rs 30000 from his pocket every month. He has just bought a new car adding Rs 16000 to his monthly liabilities as EMI. He uses his credit card for almost all the expenses to earn maximum points, which can be converted into cash but generally used for more purchases. Ramesh profoundly believes that share markets are kind of sophisticated duly legalized gambling houses, where people bet and lose their hard-earned money, and mutual funds are scams which remain in losses most of the time. As his employer has availed group life insurance and medical insurance for him, there is no need to have individual insurance policies. In last 8 years, he has worked hard and created a personal fortune of Rs 4 lac into fixed deposits with his trusted bank, which is the only safe and secure options for anyone with a sane mind.
Shailja is a member of Ramesh’s team. She has a total work experience of 6 years and takes back home Rs 63000 each month as salary. She also lives in a 3-BHK apartment with a rental of Rs 30000, but shares the same with two friends and pays Rs 10000 for space. She doesn’t own a car but takes metro and taxi rides for commuting. She put out a debit card to pay, more often than a credit card. She believes that saving is a regular habit and her monthly contribution of Rs 10000 towards SIPs, is being deducted on payday automatically. She has a total balance of Rs 12 lac in SIPs as per latest NAVs. She also has a medical insurance cover of Rs 5 lac, in addition to her employer’s standard medical policy and she pays renewal premium with yearly bonuses. She has two Recurring deposit running in her name of Rs 2000 each per month, with an accumulated fund of Rs 4 lac. She also maintains a savings account other than her salary account, with a balance of Rs 50000 to meet out any small sudden expense. She has a term-insurance cover of Rs 30 Lacs.
Shailja’s salary is lower than Ramesh’s and she has worked for two years less than Ramesh. Still, Shailja has created a personal wealth significantly higher than Ramesh. Why it is so?
First of all, Ramesh is paying half of his take-home salary as rent. House rent is an expense of pure consumption. As Ramesh is a single soul, a 3-BHK house on rent is a pure waste of money. He can live equally well in a 1-BHK apartment and can save a big part of his monthly salary. Or, he can share a big apartment with like-minded persons as Shailja is doing. Ramesh has owned a car with the help of a car loan. Moreover, if Ramesh has planned for a car in advance and followed a regular saving habit towards this goal, he may have enough funds to buy his car without a loan, saving him from the burden of paying EMI. Moreover, a car is a fast depreciating asset. It loses value very fast and running & maintenance costs are also there to have their cut from monthly earnings.
One cause of the difference is the conception of saving and expenses by them. Where Ramesh believes in saving what-is-left-over-from-the-monthly-expenses, Shailja believes in planning saving and expenses per her take home every month. She has a disciplined approach towards saving and save on the very day she earns while keeping in mind monthly expenses and having a contingency fund. The approach earning-saving-consuming has worked well for her and she has created a personal wealth for herself and still maintaining the same lifestyle as Ramesh.
Along with being good at saving, Shailja has taken a good route to invest her funds. She had taken a good decision to go with mutual-fund-SIPs and stayed invested in times of dismal returns also. And now she has multiplied her hard-earned savings, while Ramesh remains afraid of share markets. Mutual funds are not bad at all. But these are different from the bank deposits. Risk is different so the returns. Bank deposits offer predetermined returns, which gives us a sense of security and safety. But generally, these returns are way too lower to create a personal fortune. It has been observed that the banks in India offer 6-8% annual returns when average inflation is around 3-5% whereas 8-10% annual returns in the times of average inflation, the annual returns are somewhere above 6%. If we consider returns of bank deposit after adjusting for inflation rates, there left a return of meagre 2-3% and in times of higher inflation, negative real returns are also there. Yet the bank deposits yield return linearly. There are no sudden jerk and surprises. There are no good or bad times. Mutual funds have their ups and downs. Where equity funds have big swings, debt funds have smaller and minute ones. People tend to invest more in equity-oriented mutual funds/SIPs when markets are high, mutual funds are showing annual growth in two digits. And, withdraw their funds when markets are at low or making bottom and mutual funds are giving zero to negative returns. If you want to leverage the equity-based mutual funds for good returns, invest when markets are at low and switch your funds to the debt-based funds when markets are peaking. But what if you can’t figure out lows and highs of markets. Thus, the best way to invest in mutual funds is to go with SIP route and diversify your allocation into debt and equity and further, equity also in high, medium and small caps. For salary earners, there is no better option of investment into mutual funds than SIP. First thing, SIPs are regular monthly investments which develop a habit of regular saving. Investors do not have to put active work into managing SIPs rather investment professionals do the same on their behalves.
Over and above giving due importance to the SIPs, Shailja has not driven by the greed of higher return and not undermining the importance of Recurring Deposits and Insurances. It is very easy to be overwhelmed by an annual return of 20-30% of mutual fund in good times and underestimating the importance of insurances and contingency funds. Markets do not always remain on highs. One rainy day, when you are in urgent need of funds, you may have to withdraw funds from SIPs at a dismal return, which is altogether not advisable. To meet out any medical situation, Shailja has gone for medical insurance over and above what her employer-provided, virtually covering her and her parents out of any financial burden that may arise on this part. She also has taken term insurance to cover her parents, if she, who is the only bread earner for the family, meet some misfortune one day. Moreover, she has kept aside a small fund for small expenses which are not routine nature but may arise any time.