“It’s not about how much money you make, but how much money you keep, how hard it works for you and how many generations you keep it for “ – Robert Kiyosaki In this week’s newsletter we cover an important topic- Investment Strategy for the salaried. And yes, it’s on a special request. If your wallet waits for the payday; this newsletter fits you best irrespective of whether you’re a greenhorn or a veteran. Investment is common sense and common sense is not so common (just quoting Einstein). It’s no news that most of the salaried class is shuttling between the questions of how much to save and where to invest. Apparently, you’ve been waiting for our newsletter before you made up your mind so cutting the chase we present our IM4 – Investment for the Salaried.
And we will try to answer the important question everyone has thought once in a while. Can a salaried person become rich by just saving and investing? Let us find out!
The process of creating wealth as we have discussed early is built upon the ten commandments that we have covered in our previous newsletters! We might refer them from time to time, so if you don’t remember or need a refresher, don’t shy away! Read here! “I don’t know how much to save...” “But, where do I invest?” “I have no clear financial goals…” “I always end up spending a lot,” Do these rings a bell? We share your agony on the universal dilemma of finding the ideal balance between saving and investment. But, what’s the difference between saving and investment? These are methods of allocating money for future for a duration while making sure it grows. Understandably, the various methods come with a different degree of duration, growth potential, flexibility and risk. Let us understand better with an illustration:
Here’s a four-point strategy to help you get started with investing: 1.Cheat your Salary slips: The art of Saving Every salaried person can relate to the fact that no matter you are a fresher or someone who has spent twenty years in the industry. Salary day is a very important day, pretty exciting sometimes and pretty needed sometimes. No matter what stage of life you are on, the salary will always seem less because your expenses will rise proportionally with income if not more than income. Unless you cheat your salary slips! Reiterating the commandments 2Cs- Consistency and Compounding here! The more consistent you are the less you are burdened and the early you start the more compounding favors you. Back to the topic at hand. How do you cheat your salary slip? It’s quite simple actually, by lying to yourself that you make x% less than what you actually receive. And this x% is absolutely up to you based on your lifestyle, spending habits and monthly expenditure needs. Here’s a sample of x:
X= 5%-10% - Scanty saver (Bare minimum)
X= 10%-20% - Moderate Saver (Realist)
X= 20%-30% - Good saver (Recommended)
X= 30%- 40% - Aggressive saver (Not sustainable)
X% amount is the amount you tell yourself you don’t make in your salary. It’s the amount you cheat from your current self to serve a better purpose for your future self. And if you stick with this percentage by being a disciplined cheater, month after month, Eureka !!! Reiterating the commandments 2Cs- Consistency and compounding here! The more consistent you are lesser you’re burdened and earlier you start the more compounding favors you. Once it’s done over a period of six to seven months it becomes a habit. How to manage the expenses you ask, that we answer in the next strategy.
2. Understand your cash outflow: Expenses Start with a list, expenses fall into: Necessities: What are the unavoidable expenditures? Needs: What are the expenditures that are avoidable but at cost of inconvenience? Luxury: What are the expenses that are only to pamper yourself? Desire: What are the expenses that are beyond your pay scale but you wish for?
Let us elaborate… A place to live in is necessity… Owning it is need… Owning a big one is luxury… Owning a few sea facing penthouses is desire. It is prudent to keep your expenditure percentages in this decreasing priority sequence necessity, needs, luxury and finally desire. Living Expenses/Fixed: Rent, EMIs, utilities, groceries and expenses in kind. Miscellaneous/ discretionary Expenses: Viz outing, food, shopping, travel. Savings: Division of money based on your short, medium, long-term goals. Categorize your monthly expenses to see the outflow of money. It seems a trivial effort but once you put the cash outflow on the mighty excel, you can uncover the mystery of where exactly it flows. This will help you uncover the points where its redundant and where it can be cut down.
3.The Smart Businessman- Treat your salary like running a business Make a budget ! Who says you need to quit your job to actually run a business? Your monthly salary is your business and if you run it well, you can create miracles. If you have researched about good businesses like we have advised earlier, then you will come to realize one core factor for running a good business is managing its cash flows or simply put its budget. A good business optimizes its earnings and expenses to generate consistent cash flows over the year. And that creates a business worth investing in, right! On a personal front, a salaried individual has one of the greatest advantages. A consistent stream of cash flow every month. All you have to do is manage it like a smart businessman would. The prerequisites of good budget are sticking to a budget, setting realistic investment/expansion goals and spending less than you make. Very simple! A simple tracking of what is coming in and what is going out will exponentially advance you into having a sustained financial future! An ideal budget would include expenses, miscellaneous wants and savings. Here’s your reference to help you started with the planning.
50-20-30 Parameter This parameter setup divides your income into three parts. (refer image)
It’s not a thumb rule but more of a pragmatic and validated budget plan that can be utilized as beacon for your guidance. Tweak it as and when you plan your own budget. This is analogous to the atmospheric pressure measured in 1 milibar/ hectopascal, which is different for Delhi, Leh and Jupiter. Same goes to for this rule. Takeaway – This is a parameter that should be close enough to your financial plan (except for our readers from Jupiter).
4. Give importance to each asset class: Diversify your investments Every individual holds a different place in life owing to their financial and mental setup. Therefore, based on your personal setup it is prudent that you diversify your savings across asset classes and also across time. We have covered this topic of diversification in our commandments earlier, but we would like to still throw some light on how to craft a diversified portfolio. If you wish to understand diversification, jog your memory here(Point 2)! Here’s a sample saving and investment plan:
The Bottom Line Saving and investing are habits that you should inculcate from the very beginning of your career. Keeping in mind the above points, will ensure you start your journey of achieving your financial goals. You can also subscribe to The Investor School for fresh dose of investment bulletins and knowledge boosters! And lastly to answer the question, can just a simple salary make you rich? Well here are some numbers for you to figure it out.
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