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Almost everyone aspires to be wealthier than they are now, especially millennials (born between 1981 and 1996). According to marketwatch.com, millennials are lagging far behind boomers when boomers were the same age. Chances are that the next generation will also suffer the same fate unless we educate ourselves and start making our money work for us.
I’m going to tell you four important rules to ensure that you’re better off than you were. They are simple and you can start doing them today. Before we start with the four rules, I urge you to think of making money and growing your wealth as a game. A real-life FarmVille, if you will. And I’m going to show you how to win.
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1. Invest don’t save
Saving money is great and you may pat yourself on the back at the end of the day but no one else will. The reason is that everyone else is looking for avenues to invest their money.
If you don’t invest your money, inflation is going to devour it. Because the level 1 competitor in the game is inflation. That’s the default, it’s always going to be there, waiting. The easiest way to beat inflation is by making a fixed deposit in the bank where you have a checking account. You can do this online without going to your bank / getting on the phone, which is a good idea because they may try to sell other products to you.
The idea is to not leave your money idle. Your money needs to work for you. You worked hard to earn it and now it’s your money’s turn to work hard!
[There are other investment options such as investing in the stock market. That takes a bit more skill. But a good starting point is, look for companies to invest in whose products you and your friends like to use. If you think you’d like to know more about that, let me know, I’ll write a separate post on that.]
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If you’re earning a salary, the rule of thumb is, you should invest 20% — 30% of your monthly paycheque, EVERY MONTH. The idea is to beat the level 1 competition every month AND the level 2 competition, which is you. Amazon is going to tempt you to buy something that looks awesome but you can do without it.
I know this all too well. I have a full rack of dumbbells (which is basically a home gym) and I had a gym membership. It was crazy! It’s easy to say “I’ll splurge on 20 dumbbells this year and invest next year.” No! The pandemic might hit and you won’t have money to save next year. I digress.
A good framework for your budgeting exercise is:
the first 20% — 30% every month should be invested,
the next 30% — 40% can go towards rent
the next 30% — 50% can go towards household expenses and miscellaneous expenses.
If you can invest more than 30%, you’re going to get wealthier faster. Good job.
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This is where we meet the fourth competitor. The market and all the humans in it. To do better than the majority of humans, you need to invest in various avenues. For example, 30% of my investments are in fixed deposits, 50% in the stock market, 15% in mutual funds, and 5% in cash. When the pandemic hit and the stock market was going to shit I didn’t need to panic because 35% of my wealth was absolutely safe. And when the pandemic gets over and the stock market does super well, 65% of my wealth will grow.
Humans say diversification is the only free lunch in finance. And it’s 100% true. The free lunch is, in my opinion, the fact that I don’t need to worry about losing all my wealth.
This is your secret superpower. No one on the stock market wants you to know this. I may get some hate for this but f*** it.
The idea is to earn compounded returns. It is said those who understand the concept of compounding interest — earn it and those who don’t — pay it.
If I invest $100 today, and I earn 4% on it every year…
In the second year, I will have $104 (4% on 100).
In the third, $108.16 (4% on 104).
In the fourth, $112.4864 (4% on 108.16).
In the thirtieth year I will have $ 324.3398 and so on…
Before I get the hate, the reason people on the stock market don’t want you to know this is because most fund managers can’t hold investments for a long time. They need to show a turnover or profit every quarter. So their focus sometimes tends to be short term.
But there are pros and cons to everything. I’m not throwing any shade on anyone. Although it is cheaper to manage your own money and it may even be fun.
As your wealth grows you may be tempted to sell your investments and buy an impractical car. It’s a good idea to have long term goals such as paying for a degree, buying a house, retirement, etc. That thought will keep you on track and will make you feel less tempted to sell your investments.