Personal Financial Management: Golden Rules of Investing

The world economy has been through tough times over the past few years and covid 19 has added only more challenges to it.

In 2006, the housing bubble burst in the USA and this then led to a subprime credit crisis at an unprecedented scale. Series of bailout programs by countries across the globe brought the equilibrium back to the economy. Today, we are again in a similar situation due to Covid 19 which has led many borrowers to default and businesses to go bankrupt.

Events like this remind us of the time we live in and challenge our lifestyle be it rising income or easy credit or luxury vacation or even marriage plans. The rosy picture turns pale overnight with job loss, rising prices, and debts. But it’s not needed to be this way. Isn’t it?

With a bit of smart planning and investing you can easily cushion any crisis such as Covid 19 or any future events.

Why Invest?

  • The core principle here is to make your hard-earned money work harder for you
  • Understand your cash flows — How much money is coming in (Income = Money IN) and how much is going out (Expense = Money OUT)
  • Do you invest first or wait until all your expenses are met before investing?

As Kiyosaki mentioned in his book ‘Rich Dad Poor Dad’ the secret to getting rich is to pay yourself first, that is to invest in your future.

Normal Cash Flow = Income — Expense = Savings

Smart Cash Flow = Income — Savings = Expense

Where to Invest?

There are so many investment avenues available today such as Stocks, Bonds, ETFs, Mutual Funds, FD, Post office schemes, Other commodities, Cryptocurrencies, etc.

But the core principle is to ensure your returns are keeping up with the inflation.

What is inflation? In short, inflation reduces the value of your money. As inflation goes up, the purchasing power decreases

So always track your real return.

Real return = Return from any investment — Inflation

Magic of Compounding

Every time you reinvest the interest or dividend, your capital goes up and next time you earn interest or dividend on this enhanced capital. These small extra amounts will add up to a tidy sum.

Albert Einstein quoted that Compounding is the greatest mathematical discovery!

So to summarize, follow the golden rules and stay awake!

  • Golden Rule 1 — Be Smart. Have a Smart Cash Flow.
  • Golden Rule 2 — Track the Real Return.
  • Golden Rule 3 — Experience the power of Compounding by reinvesting.

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