RAGS TO RICHES | Invest Like a Beginner! (Part 1)
Rags to Riches is a monthly column published for the ArtNowThus Blog and Newsletter. Put together by Ragini with the help of experts, this column hopes to break down the journey to the coveted destination of financial freedom! With stories, realistic examples and easy-to-follow steps, we hope that this column will build your confidence and help you take ownership of your earnings.
Written by Ragini Singh Khushwaha, founder of ArtNowThus and subject matter expert on the arts, media and content, cats, random factlets from around the world and productivity hacks.
With inputs from Sakina and Husein Merchant, Chartered Accountants who attempt to bring out their best selves by combining their professional skills and their love of being around and learning from other creators.
Investing may be financial management 101 (well, 103 according to me - 101 would be personal budgeting and 102 is creating a savings plan), but I got started with it pretty late in life.
And the reason for that is because
a) investing can sound very complex and confusing especially if you’re new to the world of financial jargon, and
b) complex things are scary
So that’s the purpose of this edition of Rags to Riches, to make investing more understandable and less scary. Hopefully.
First Question: Do I need to invest?
While it’s hard for me to give you an unequivocal answer without knowing your personal financial situation, I will say this - if you are on the way to having all your other financial ducks in place (namely, no high-interest debt and an emergency fund), then investing is probably the logical next step for you in your financial journey.
Investing is basically putting your money towards something that is likely to give you higher returns in the future i.e. you’re expecting you’ll get more than you put in.
Second Question: Why is investing a better thing to do with my money than leaving it parked in my savings account?
To be honest, parking my savings in my savings accounts was basically my preferred method until 2019. I mean, it’s called a S-A-V-I-N-G-S account for a reason, right?
WRONG!
The answer to this is twofold (question so nice, I’ll answer it twice :D):
Low Returns:
Returns is a term you will hear often through your investment journey. Short for Return on Investment (long for ROI), returns are simply the money made or lost on an investment over a period of time. The rates of returns on investments are calculated in percentage terms and these numbers are the most significant in any investment decision you will make. And when it comes to leaving your money in your savings account, generally speaking, the return on your money is far lower than the returns it could potentially earn in most other investment instruments.
Which means your money is making far less money on itself than it could be.
Which is essentially the key purpose of investing. So though your money does give you some returns through the interest it earns in your savings account, the rates are too low to actually benefit you. In fact, even in a period of a year (which in some people’s investing worlds is very short!), leaving your money parked in your savings account is losing you money. How?
Because of this thing called Inflation:
Inflation is basically the rise in the costs of the things we consume. Rates of inflation annually are usually higher than the interest rate your bank is giving you on the money in your savings account. So if you have Rs.100 in your savings account and your interest rate on this hypothetically is 3%, at the end of the year you now have Rs.103 in your account. But if inflation is rising at a rate of say 6% annually, then the purchasing power of your money has actually reduced to less than Rs.103.
For this reason,
Investing in assets where the rate of return will beat the rate of inflation is an important factor to consider when you invest. And savings accounts are definitely not it.
Easy peasy.
Third Question: What do I do now?
Even as a first-time investor, there are multiple ways and means to invest your money. However, for the first part of this series, I am going to cover the darling of every risk-averse investor - our beloved Fixed Deposits.
A Fixed Deposit or FD is a lump of money you put aside in your bank at a fixed rate of interest for a fixed period of time.
Most of us would have heard our parents talk about this, often accompanied with a twinkle in their eye (fixed deposits and gold are the holy grail of investments after all, in most Indian households). FDs are basically money you give to your bank (so in effect you are loaning it to the bank), and the bank gives you your money back at the end of the term with interest. Given the fixed rate of interest, FDs are a super safe way to set aside money and have it earn a higher rate of interest than it would in your savings account alone.
Probably Relevant Side-Note: Since the money set aside in an FD, does lie with the bank for the period of your investment, it’s a very good idea to create FDs in reputable banks where you know you will get your money back at the end of the term. Lesser known entities might be a very risky bet on an FD, but any well known bank is pretty much a sure deal on these.
Fourth Question: How do I set this up?
If you have a sum of money ready to invest, just head over to your bank and ask them to set up an FD for you. Make sure you’re clear on the period of time you’re investing your money for and what the rate of interest will be.
FDs are generally pretty liquid too, which means you can have access to the money quite easily if needed. It’s also important to be very clear on what the penalty is if you do choose to withdraw your money before this period is up. Most banks charge a small penalty fee for breaking an FD earlier than the term period, but it’s always good to know exactly what you’re getting into.
But if you don’t have a lump sum of cash sitting around waiting for its perfect FD, no worries at all. Enter the Recurring Deposit. Recurring Deposits or RDs are a sum of money each month you can set aside towards your savings through your bank. And if there is one reason I love a good RD, it’s because it literally has the lowest barrier to entry. You can set up an RD for as low as Rs.10 in some banks which is just 😍😍😍.
So as long as you can put in the sum of money for a minimum of six months, you’re good to get rolling! (Most RDs can be active from a period of six months to a maximum of ten years.)
Probably Relevant Side-Note: Rates of interest on RDs do vary from bank to bank, so again it’s very important to check the rate of interest you’re getting. Also, some banks might not allow mid-term withdrawals on RDs, so if you’re going the RD route make sure you check on that as well.
Ta-da! Does this mean you’ve found your ultimate investment plan as well? Unfortunately, the world of finance will never be THAT easy (is also something I’m beginning to learn as I continue to write this blog - there are no absolute answers ever!).
But as the first step down the yellow brick road to investing like a pro, FDs are a pretty good place to start without feeling overwhelmed.
So stay tuned!
The Big Fine Print:
We’d like to establish that while the principles outlined in this section should pertain to anyone, we’ve put this together with a focus on creative professionals and freelance workers. Also, while we do have Husein and Sakina consulting with us on this column and keeping us straight, we’re not financial advisors. This column is for informational and recreational purposes only and in no way meant to offer advice or recommendations.