Tags:vaibhav,personal-finance
Highlights & Notes
Step 1: Insure
No matter how hard you work to make money, there are some events and risks in life which have the potential to wipe out all your savings and even push you into debt. Stories of people developing chronic diseases or meeting an accident which forces them out of work are not unheard of.
Freedom means having enough money to take a 2-hour flight when you’d otherwise have to travel 36 hours in a train. It means being able to skip the crowd and get the most comfortable seat at your favourite artist’s concert.
An emergency fund is the money you keep in liquid form (cash, FD’s, etc.) which can be immediately sold off or traded for emergency situations not covered by insurance, or when you lose all your sources of income and now need extra funds to meet your fixed recurring expenses. The rate of interest on the emergency is of little importance as long as it beats inflation. Liquidity is the most important factor while deciding on the instrument for cultivating an emergency fund.
The reason for buying insurance before building an emergency fund is simple. For most young people, The reason for buying insurance before building an emergency fund is simple. For most young people, the amount needed to buy an annually renewed insurance policy is generally much lower compared to the money needed for an emergency fund. Also, if an unlikely disaster strikes, for example, a health issue, it can wipe out most people’s emergency funds in days.
Aided by the powers of compounding, I see two key ways to magnify wealth -
- Compound interest on monthly savings (recommended)
- Compound interest on front-loaded gains (more powerful)
Consistently investing each month tends to have a cost averaging effect. Some of the months (when the market is bullish), you’d be buying fewer stocks for the same price and buying more when the market has a lot more sellers than buyers.
The problem is excessive marketing of stocks and mutual funds in the last decade along with ease of investing has made youngsters jump the gun and dive into these without paying attention to the previous two steps (insure and secure).
You essentially front-load your effort and time to generate large sums of money in a time much shorter than what average people take (often their whole careers) which then allows you to employ the powers of compound interest on a much larger base starting point, and that’s what gives you the filthy richness later on. This is the core concept behind the “Fastlane Way” popularized by author MJ Demarco in his book “The Millionaire Fastlane”.
It’s fine if you don’t want to be filthy rich, as long as you are not hoping that a 9-5 and compounding alone will get you there.
Key Takeaway
- Insure
- Secure — Emergency Funds
- Magnify — Debt/Equity investments, start own biz