Finance Basics for Newbies
In this blog, we'll go over the basic things everyone should know of before making financial decisions – from saving and budgeting, to investing and avoiding common mistakes.
Introduction
Earning money may be hard, but managing money afterward is even harder if you're not careful. There are a lot of very carefully thought-out and crafty traps, which will lure you in if you don't pay attention and are careless with your money. I haven't fully read the book called "The Psychology of Money" (mainly just because I'm lazy), but when I did start reading it, I remember there were examples of people who got rich very quick, but lost it all in no time as well because of their spending habits.
Everyone in this world is different, with their own set of ideologies, ambitions, goals and most importantly their mindset and the environment they come from. A person who has seen poverty and hasn't lived a life in luxury will likely never be as comfortable spending money carelessly as someone who comes from a rich background. This is simply because of the view they have in their minds, based on what they've experienced. The previously poor guy will likely be more responsible with money. Sure this is not true for everyone, and I've met and am friends with some very sound people who come from rich backgrounds yet are very humble and respectful towards money.
The key thing here is that not everyone is the same everyone has a different perspective on money, different ways of spending and different levels of lifestyle they're comfortable with. A simple hardworking man, who has enough savings to live a modest life will probably never try invest aggressively or throw money at luxury items that hold no value to him, because he does not want to show off or prove anything to anyone. Whereas someone whose job places them among rich people will feel the need to buy those luxury items as investments.
In any case, basic finance knowledge is important for less risk-taking people, people who don't want to go completely broke and for the majority of people who work hard for their families. Let's get started by questioning why we need to invest money. Investment might not just be in the stock market or crypto; it can be anything. It can be your brother's business, a property or literally anything that will act as an asset and has high chances of giving you a stable return.
The answer pretty obvious, idle cash is of no worth, except that it's available to you at all times in case of an emergency. However, it also poses a risk that you might be tempted to just spend that cash. Your cash or money should work for you, it does not have to give you a huge return but it should provide you enough returns to fight the inflation. If you buy a property now, you have that property as an asset, which you might sell for a higher amount in the future. You’ll at least gain the same value after inflation, if not more, but if you had the cash sitting idle, the value would decrease.
There are countless types of investments one can make and the earlier one starts, the better. There’s no minimum limit on investments one should make, but one should at least start incorporating good financial habits into their life. The most common types of investments you’ll find as a beginner are either gold or the stock market. For the stock market, you don’t need to buy individual stocks; you should rather focus on mutual funds and index funds. Mutual funds are created and managed by experienced investors and usually have a good return rate. You can simply start your investment journey by putting some amount into those mutual funds directly or by committing to an SIP (Systematic Investment Plan), which invests a specific amount every X days or at whatever interval you choose.
Few Principles & Ideas
Coming back to the topic of finance basics. One basic thing we learned above is that money shouldn’t sit idle and you should invest it as soon as you can. But before that comes a few principles or ideas you should get straight in your head.
Spend less than what you earn
Spending less than what you earn is a very simple rule. First of all, you should avoid all the luxury items you want to get just for your desires. For example, if I’m earning 10,000 INR a month, I should definitely not purchase an iPhone that costs 100,000 INR and in no way is helpful in my life. A phone that costs around 10,000 INR will serve my purpose just as well. Moreover, if you’re earning less than average (I don’t mean the nationwide average but the average one should earn for the lifestyle you like), then you should rather focus on your work and skills instead of trying to fit in by purchasing expensive things you can’t afford. Avoid EMIs if you can, at least for your wants. If you cannot purchase it with full cash, while being ready to pay twice the amount for the same thing, then think again before purchasing.
There’s a very small exception here. Sometimes, if you have food on your plate and you really need something expensive that might help you in your business/job/skill, then you should consider getting it, but you’ll have to be honest with yourself. An example would be a MacBook for an aspiring developer or a good camera/microphone for a content creator.
Emergency Fund
The day you start earning money, the first thing you should do is create a 6-month emergency fund. I cannot stress this enough, I have seen more than 10 people who did not create an emergency fund and faced the consequences. I myself started earning, then spent carelessly and ended up with no money again, only to start asking my parents for rent.
An emergency fund is basically a locked amount that you will NOT touch in any case other than when you stop earning and have no or little savings. It should be the total of all your monthly expenses combined * 6. Its only purpose is to ensure you don’t end up on the road immediately if you lose your job or a pandemic strikes.
There may be many reasons you could lose your stable income for a short period of time, like layoffs, health issues, company problems etc. You need this fund to survive at least 6 months so that you can figure things out. I spend no more than 20,000 INR, so my current emergency fund is (20,000 * 6 = 1,20,000) kept safe in an account. If you upgrade your lifestyle, let’s say you get a better place with higher rent or you have other expenses then make sure you upgrade the emergency fund as well.
Debt & Credit Cards
Debt is a very sensitive topic; if you can avoid it, then avoid it. If you take loans from your friends or family and fail to return them on time, it will directly impact your image in their eyes. The same goes for giving loans or lending money to your friends or family. Only lend money to people who are actually in need and where you have full confidence you’ll get the money back on time. If you take very high-interest loans from banks or random services, then you’re cooked.
Credit cards are another scam (if you aren't careful of-course). For a person who does not earn well, credit cards should be avoided at any cost. Only if you know what you’re doing should you use credit cards. They are designed in such a way that once you take the bait, they’ll suck more out of you than they’ve ever offered. If you have the same credit available in your bank account, then generally you should use credit cards (in a simple way, if you’re sure you can pay the bills 😃).
Investing & Diversification
As discussed earlier, one should start investing as early as possible. There’s various reasons for that which simply add up to you getting more benefits from early investments (compound interests). You can invest in stocks, mutual funds, index funds, gold, ETFs etc. Only make sure you’re not completely putting your money at one place. For example, if I’m investing in mutual funds, I won’t put all the money in one mutual fund. This is because it’s very much possible that one stock or mutual fund may not perform well. You should diversify your portfolio to a certain extent that you’re very much likely to still get good returns if one or few of your investments just fail to perform well. You can also look for other investment options like US Stocks, real life assets (gold, silver) or crypto.
Investments
As discussed, at an early stage when you don't have a lot of spare cash, you should look for safe investment options such as mutual funds, index funds, gold etc. Only when you have extra cash that you are willing to risk for a potentially higher risk-reward should you consider swing stocks, buying crypto or other volatile assets. It's also a standard practice to have your investment goals well defined, such as investing for purchasing a car, a house or anything else.
If you're a low-income individual, then you'd want to maximize your skills and chances of rising up in the income game first. You can tune investments according to your needs, and generally, it's a great idea to start SIPs and increase them as you rise up the ladder and grow.
Ideally, you should also have some well-defined goals for your investment capital. For example, at age X, you'd want your investment value (not the current value) to be Y amount, depending on your future goals and plans. This helps you better meet your financial and retirement goals.
Credit Cards (Part II)
Previously, I said credit cards are a scam and for most cards, that’s true. Most branded cards or the cards you can easily get are traps; they offer nothing but make your spending habits worse. Just because you have instant credit available, you may be tempted to buy things you don’t really need.
However, if you're earning a decent amount of money, then credit cards can be a blessing. They can serve as one of the best tools to get you heavy discounts, free trips, accommodations etc. In short, if you have a decent income and you can be disciplined enough not to be manipulated by your desires and you have enough time to research and spend according to the best available card, then it’s great. Credit cards will also build you a good credit score in the long run, which can help you get loans at cheaper rates.
There are many pitfalls with credit cards. A simple one is that you should not use more than 30% of your limit and never, ever withdraw cash from credit cards, there might be hidden fees and whatnot. Better be careful with it.
Business credit cards have the most features and benefits. The best example of credit card benefits is this channel: Colin Credit.
Other Hacks & Ideas
The 21 or 30 Day Rule
Well, I don’t know if it’s actually a rule, but whenever you feel like buying something, it’s highly likely just a temporary urge. This has happened to me many times. For example, once I really wanted to buy a smartwatch that was quite expensive. After procrastinating for 20–30 days, the feeling was gone, and I even went against the idea of buying one because they’re practically useless (at least the ones I was considering).
The same thing happened when I wanted to get a cheap Xiaomi tablet, thinking it would 10x my productivity. After some time, the urge disappeared, and I later realized I didn’t need a tablet at all.
So, if possible, take your time. Wait at least a few days, if not 21 or 30, and then decide properly. Don’t let your emotions control your purchases. Some people I know are very clear about this; they can tell beforehand if they really need something or not, and they’ll only buy it if they truly do.
Managing Accounts & Online Payments
Budgeting is often hard, especially when you have all the payments online, since it's very easy to pay or spend money via online mediums. Usually, the feeling of money is gone, I don't know how to explain it well, but physical cash just gives you that sense of responsibility that digital numbers usually do not.
You can keep different accounts for different things, like virtual wallets only for subscriptions, so you can easily track and manage them and there’s no ghost subscription sucking money out of your account every month. One account for UPI or quick payments that you use on a daily basis, and another main account for all your salary, rent and other major expenses.
Separating accounts can help you better keep track of your money and even set limits on spending. For example, you could say, “I will not spend more than ₹3,000 a week” and only keep that amount in the hot account for the week.
Avoid online payments if you’re completely out of control, this might actually help you fix your spending habits lol. But it’s just a suggestion.
Trading & Business
A lot of people get influenced by crypto or online traders as seen on social media platforms such as Instagram or YouTube. While trading can be a very rewarding profession, it often requires an immense amount of time, knowledge, skills and most importantly, luck. Most of the influencers on Instagram are either faking it or have built their wealth by selling courses. One should avoid get rich quick schemes and courses. If you really want to trade, then focus on fundamentals and spend time looking at charts instead of getting insanely motivated by someone flexing their rented Lamborghini on Instagram. Here’s a great video on this topic: https://www.youtube.com/watch?v=qOitHGCipc0
Only trade with a margin you are absolutely fine with losing and that won’t hurt your mental health.
Business also requires a good amount of dedication and risk-taking capabilities. If you’re very confident in the product or service of your business, then definitely take the risk. Most financial advice or standard practices would not apply here since it’s riskier with huge reward potential, so this section is often very opinionated from person to person.
Another simple note is that hard work is required if you’re on your way to building wealth. You just cannot print money out of thin air without doing any hard work. Even if you get lucky, that luck is likely the result of your past hard work.
Afterword
I am by no means a certified expert or professional in finance. Everything above is simply based on my personal learnings and experiences, and none of it should be taken as financial advice. Thanks a lot for reading!