If You Really Want To Get Financially Educated, This Is The Article That You Need To Read
Most individuals are not lucky enough to get great financial education from their families.
A conventional low to mid-income group family teaches the following:
- Work hard to reach a position to earn a high salary
- Buy a house and a car
- Buy luxury goods/ gold as they are a reflection of how wealthy you are
- Keep the money left after spending in a Savings account
- ‘Invest’ money in a Fixed Deposit
- Stay away from Stocks because it is Gambling
- Bitcoin? What is this? Get me a Government-backed coin.
- Don’t share money ideas with people. They will steal it from you.
- Get investment advice from people similar to your income group. Rich people are just lucky/ unfair.
- Don’t deviate from the above as people commonly scam you in money matters.
- Get financial education from business channels/ newspapers if you want to (never recommended because you already have the best above financial strategy, aha!).
Do you identify with any of the above?
Take a deep breath.
The above is the best recipe for a financial disaster.
You’ll work and grind till your 70s and die in debt if you follow the above principles.
Here is what you need to learn/ relearn right now if you aim for financial freedom at any point in life.
Lesson 1: Asset vs. Liability
Anything which generates income is an Asset.
An asset can be appreciating or depreciating based on if its value increases or decreases over time, respectively.
For example, my Surface laptop is a depreciating asset (an asset because it makes me generate wealth by creating digital products like this article).
Shares in a company, precious metals, cryptocurrencies are appreciating assets.
Anything that takes away your money is a Liability.
Example: Car (if not used for business purposes), credit card debt, your new LV bag.
Takeaway: Buy Assets, Avoid Liabilities.
Lesson 2: Your House Is NOT An Asset
The house that you live in is not an asset.
It is a big liability.
It is crazy to go into 30 years of debt for the house that you live in.
The house that you live in is a constant drain on your money.
Rent instead.
Takeaway: Do not put all your income into buying the house that you live in.
Lesson 3: To Buy Liabilities, Invest In Assets First
I am not asking you to live frugally till you die and save every penny that you earn.
The whole idea is to buy assets first that bring in money.
Takeaway: Use the money earned through assets to buy liabilities (or preferably reinvest in assets).
Lesson 4: Inflation Keeps Your Poor
Inflation is the rate at which the prices for goods and services are rising, and, subsequently, purchasing power of the money that you have is falling.
Imagine that last year you could buy a cup of coffee for $3, but this year it costs $3.50. The price has gone up by 50 cents.
In other words, this means that the purchasing power of each dollar has gone down.
That’s inflation!
Inflation happens when there is a lot of money in circulation and now when a lot of people want the same thing, the price of things goes up.
Inflation also happens if it gets more expensive for companies to make things/ give services, and hence the price of goods/ services rise.
You will frequently see newspapers quoting an Inflation rate. Let’s say that if the inflation rate is 5%, it means that, on average, prices of things have gone up by 5% compared to the previous year.
Lesson 5: Learn How Banks Work
A bank lends your deposited money.
If you keep $100 in a fixed deposit at a 4% return per annum, your bank lends it to another person at an 8% interest rate and keeps the difference as their profit.
Your money is not actually kept in a safe in a bank.
If all customers approach the bank to withdraw their money at the same time, the bank will simply back out.
Takeaway: Banks work for themselves, not for you.
Lesson 6: Understand The Role Of Debt
Buying a $1000 ULED TV on Credit card debt is an extremely bad idea unless watching shows on the TV tells you ideas to earn more than the rate of interest on the debt and pay for the cost of the TV.
Going into a 30-year debt for a $200k house is a stupid idea unless the house can be rented and pays for its cost and the rate of interest on the debt.
Takeaway: Debt is bad unless used to buy assets.
Lesson 7: Pay Yourself First
Most people will binge spend on liabilities as soon as they get their salary each month.
Do the contrary.
It is not how much you earn, it is how much you can keep out of it.
Takeaway: When you receive that monthly paycheck of yours, invest the money to buy assets/ learn new skills that generate wealth (investing in yourself).
Lesson 8: Ditch Fixed Deposits
You lose money when you keep it in a Fixed deposit.
The return rate on an FD is less than inflation.
Let’s say that your FD returns 4% per year on your invested amount and inflation is 7%, you are losing 3% money every year.
Takeaway: Find investments that return at least more than the rate of inflation.
Lesson 9: Invest In A Passively Managed Index Fund Before You Learn To Pick Individual Stocks
An Index fund is a fund that tracks the overall performance of the stock market.
For example, The S&P 500, or Standard & Poor’s 500, is a stock market index that tracks the performance of 500 large publicly-traded companies in the United States.
If you invest in this fund, you are putting your money into the largest 500 companies in the US.
The historical annual rate of return of the S&P 500 is shown below.
A popular fund that I invest in is Vanguard’s S&P 500 UCITS ETF, a passively managed fund. This means that a finance guy is not constantly shuffling my portfolio all the time (and taking a hefty management fee for it) and I am simply putting my money in the top 500 U.S. companies in proportion.
Is it risky one would ask?
The answer to this is obtained by asking a simple question:
How many times have you experienced the largest companies in your country going bankrupt?
I have, not even once.
You can check out other passive funds tracking the following indexes, to invest in:
- NIFTY50 (India)
- SENSEX (India)
- FTSE50 (United Kingdom)
If you’re learning to pick individual stocks to invest in, the following will help:
Lesson 10: Jewellery Is Not A Good Investment
Jewellery is not a good investment for several reasons.
- Retailers often mark up the price of jewellery. This means that if you were to resell the item, you’d likely get less than what you paid for it.
- Jewellery items often might lose their value based on design, brand, and other factors that may not hold over time
- Jewellery doesn’t provide any income while you own it.
- Jewellery is not a liquid asset, meaning that it may take time to sell, and you might not be able to sell it for the price you want when you need cash.
Takeaway: If you want to invest in precious metals, buy coins, bars, or bullion. Avoid buying jewellery for investment purposes.
The complete article with my 26 financial lessons can be found in my newsletter here:
