Thus far in life, money/and or the art of wealth creation still fascinates me. It still intrigues me. I have learnt a few things and plan to continue to put them to use throughout my journey to become financially successful. A journey that I plan to document on this website to track my performance, insights, and learnings thereof. The end goal being money working for me, and not the other way around. Considering this is a personal finance blog, it is only apt to have a real personal finance article. The following article summarizes my journey from the books and blogs I have read, mistakes I made, and the maxims thereof.
Lesson 1: Save more than you spend. Then, invest the savings.
This is self-explanatory. The inflows should always outweigh the outflows consistently. Investing consistently at a risk-return you’re comfortable with is the next logical step. I am much more of a growth-value investor than a value-growth investor. I will put the prospects of growth above dividends, assuming other factors are constant.
I learnt a great deal of personal finance management from the book, The Richest Man in Babylon. In fact, this book got me into financial planning and thinking about financial freedom on a serious note. It is not only a quick read but also a simple book that outlines the rules of financial prosperity. I highly recommend you to read it as this book changed my perspective on becoming wealthy. It was the first personal finance book that had a significant impact on me that eventually snowballed to following other personal finance blogs and finally starting my own.
Lesson 2: Be willing to work on soft skills by reading books, and putting them in practise.
Our lives involve communication with humans and computers. It becomes important to learn the art of communication, negotiation, and computer skills. It may also mean to improve and/or better your skills in your specialized discipline. For instance, my field of expertise is Finance, and I know nothing about computers. Considering I spend most of my time in front of a computer it becomes important to educate myself in this realm – MS Word, MS Excel, perhaps programming languages and as such.
Not only would this make you more efficient and better equipped to deal with your everyday life, it would make your life much more rewarding rather than leaving everything to chance, destiny, luck, or whatever. In the process, you’d enhance your perspective on life and enable you to notice more opportunities as you’re widening your “moat”.
Lesson 3: Pay special importance to taxes.
This is one of the most important aspect of financial freedom and yet is often ignored. If you don’t know how the tax system of your province/state works, you’re missing out on the advantages and may end up with more outflows than necessary. Plus, why would I want to pay someone to do my taxes who is less likely to tell me the many ways I could be taking advantage of the tax system?
Lesson 4: Leverage.
One of the most important and yet most underrated aspect, perhaps more important yet underrated than understanding taxes. Leverage when used properly can magnify your gains, and when otherwise can prove disastrous. However, most successful people and entities have used leverage for their benefit. Here, I would highly recommend reading Rich Dad Poor Dad. Some of the advice is invaluable and have heard great reviews of this book for people wanting to achieve financial independence.
The fundamental goal of capitalism is to move money for its most efficient purpose where it can earn a higher return. If we can borrow money at 4% and earn 7% from that, we have just profited 3%. We borrow to buy a house, car, etc., why should we look down on leverage when it comes to increasing our net worth?
Personally, I need to look more into this aspect as I find I have neglected this one when compared to the rest.
Lesson 5: Re-evaluate your investments, needs, and goals.
The idea is to not get comfortable with your investments and the need to monitor them to compare their performance against your initial expectations/goal before making the investment.
This means knowing the sell price before you start investing. This is tricky. Not many of us know when to sell. This is where Warren Buffet’s popular advice comes in handy, “Be greedy when others are fearful, and be fearful when others are greedy.” The latter part explains to sell when just about everyone around you think they have understood the secret of getting rich quick by investing in a specific asset (i.e. Real Estate in 2006 before the subprime mortgage crisis in 2008), stocks, etc.
The other day, my friend was talking about how someone was giving out his or her views on “become rich quick” by buying Bitcoin. Similarly, I was skimming through Reddit, and found this other individual giving out his opinion on how investing in Google, Apple, Nvidia, and Dominoes Pizza is a sure way to make money. After processing the above two situations, I was certain of one thing – these people are sheep and/or have a herd mentality. When everyone in public seems to know how to make money, that’s a red flag – as all the smart money would then disinvest.
Lesson 6: Plan for expenses before they come. Set up an emergency fund.
I can’t emphasize this enough. While its one thing to invest, there is no point in investing if you have to borrow for your unseen short term expenses, or have to disinvest to meet those expenses. The point of investment is to put away excess money and earn a decent return on that principal.
Ideally, I like to have 3-5 months of my monthly expenses for my emergency fund. In addition, if I see some additional expenses coming up I like to save more and increase the dollar value in my emergency fund. It is essential to have this emergency fund in cash, as you can access it any time you want and not have to worry about the market swings or any other variables.
Update: Since my initial draft, DPZ stock suffered an approximate 10% loss, and I am not surprised. People seem to forget the distinction between investment and speculation. If everything worthwhile was so easy in life (including financial freedom), no one would value it as much. Hence people tend to value things that are hard or take longer to attain.
Note: The above books are affiliate links. While I recommend them for any beginner that wants to embark on the journey of financial independence, I have found myself revisiting to these books over and over again. It is truly an invaluable resource, and expands your horizon while motivating you on the topic at the same time.