Saturday, October 25, 2008

Avoid Mistakes with your Money

The great stock market crash of 2008, which saw the Sensex fall from 21,000 to 8,000 in a year, has left many worried about their losses and their financial future. At this juncture, it is necessary for you to know some important tips and facts.

1. Money you NEED goes in the bank
Never make the mistake of investing crucial money in the stock market. If you have money that you require to buy basic necessities (food, fuel etc.), do not put that in the stock market. If however, you come across some extra money (in the form of a bonus or a gift), you can put that in stocks. The stock market is not a charity: it can drag you down with a vengeance. Be very careful while putting your money in it.

2. Your house is never safe
Don't think that by storing all the money you have in your house, you can avoid every financial theory every thought of. If you keep all your money at home, you are still losing money. That's because of inflation. Inflation basically means the rate at which the value of your money is depreciating, or in other words, the rate at which things are become costlier. 

There's an old joke: inflation can your money in half without touching the paper. By keeping your money at home, it becomes static and loses its value. You must invest your money (in a bank, in stocks, bonds, gold etc.) to make sure that, at the very least, its value rises by a rate equal to the general rate of inflation. Otherwise, you are making a net loss year after year.

3. Check your age
As you grow older, you do not want to put more of your money in stocks (also called equities). This is because if the market falls sharply, you do not have the time to wait for it to recover. Say you invested Rs. 10 lakhs in stocks. Now, lets say that value became Rs. 2 lakhs in a year. If you are young, you have the option of keeping that money in the market for several decades more, but if you are fairly old, you might need the money at any time (for medical bills or dietary supplements). In such a case, you cannot wait for a few decades: time is not on your side.

In general, and there can be exceptions to this, the proportion of your money invested in equities should decrease as you grow older. At an older age, look at fixed-income securities, such as bonds issued by a stable government. 

4. PF and Life Insurance
It is highly recommended that you open a Provident Fund Account (PF), preferably one that is matched by your employer. What does that mean? It means that your employer takes a percentage of your salary each month and puts it in your PF Account, which can be used after retirement, and adds an equal amount to it. If such a provision does not exist where you work, open your own account and save some money each month.

For younger employees, Life Insurance is important. LI is a sort of security: anything could happen to you and your family needs some protection against a major tragedy. Whether you are a man or woman, you must have Life Insurance for the good of your own family. Plus, PF and LI are tax exempt (up to a certain limit).

5. Pay off your debts
If you have accumulated some debt (credit cards, car loans, home loans etc.) your top priority must be to pay it off. Don't take a loan that you cannot possibly pay off: be aware of your financial situation and take only as much debt as you can pay off. Avoid any credit card debt, the interest will kill you. For other sorts of loans, be prepared to face higher EMIs in case of a financial downturn. Again, don't borrow more that you can pay off in time.

6. Read
There is a lot of information out there that you need to know. Visit websites, read magazines and newspapers, read a book: you need to find out about the world you live in. For instance, do you know what makes a bank really "safe"? Do you know why tomatoes cost a lot more all of a sudden? You need to learn about all these things. Knowledge is the key.

7. Lastly, budget
Always try to prepare a budget of your monthly expenses. Include essential items and necessary payments (such as EMIs, schools fees etc.) but don't try to add any luxuries in the list. If you are lucky enough to have money left after you've bought your monthly supplies, try to save as much of it as you can, in a bank, mutual fund or any appropriate investment. You can take some of that money for luxuries: maybe take the family out for a movie a few times, eat out once or twice a month. If you've put enough money in your savings and paid off your bills, you are entitled to some fun!

Be optimistic, be patient and act smart. That's my advice for all of you.

Disclaimer: The views expressed above are my own and are meant for general reading. They are not universal in nature. Please consult an able professional before making any decision regarding your money.

1 comment:

Rinchen said...

Very informative! I normally dont read/know much of these things. But I liked your suggestions.

I'm going to remember this - The stock market is not a charity: it can drag you down with a vengeance. part henceforth.