Financial literacy is an individual’s path to financial independence

Did you know that while reading this article, your fixed deposit is actually losing money?

Currently, savings/FD account interest rates range between 3.5-5% per annum. Industry experts say inflation this year will be approx. 7 percent. This means that although your money will increase from 100 to 104 this year, your expenses will increase at a faster rate. “Money is trash” is a famous saying in the markets for this reason – your money generates negative real returns for you when inflation is high.

Kanika Agarrwal, co-founder of Upside AI says, “Thinking, learning and talking about money is a boring/daunting task for most of us, which is why we end up procrastinating on this most important aspect of our lives. . Therefore, our money stays in the bank and loses its value.

The most important aspects of saving and investing are: time and the magic of compounding. Therefore, says Agarrwal, “it is important to acquire financial knowledge to understand how to save, set goals, where to invest, what to buy, how to compare returns”.

How should you start?

The first step is budgeting and saving. Regardless of age, gender, or work experience, saving and budgeting are skills everyone should know. Agarrwal explains, “Essentially, Step 1 is to create your own personal profit and loss account where you track your income, expenses, and savings.”

The next step is to take out insurance – health and duration. Insurance is not meant to be an investment product but a safety net. Agarrwal points out, “Therefore, avoid endowment plans and ULIPs and focus on solving the worst-case scenarios, which is what term insurance and health insurance do for you and your family.”

According to experts, the next step is to invest this money. The decisions you make to invest are (1) asset allocation (2) stock selection; and (3) market timing.

Asset allocation

Of the three, asset allocation, Agarrwal points out, “will always have a disproportionate impact on achieving one’s financial goals.” Asset allocation is basically deciding which asset classes you are going to invest in i.e. stocks, debt, gold, real estate, etc.

Once you know what you can save each month, you need to allocate it to different assets. Experts say this is important because in any given year a different asset would do well – stocks, debt, gold, real estate, etc. When you hold a balanced portfolio, you guarantee reasonable returns without too much volatility in the portfolio.

For example, what if you only buy stocks and mutual funds? You would do very well in 2021, for example, but your portfolio would have dropped 20-30% in March 2020. On the other hand, if you added more assets, you would see a more even curve on the growth of the silver.

Agarrwal says, “In general, the younger you are, the more risks you can take. Therefore, you may be able to invest more in equities (ETFs, mutual funds, stocks) and less in debt (fixed deposits, liquid funds).

Choose what to buy

After that comes the choice of what to buy. When investing in stocks, try to choose products that give you a diversified portfolio – for example, according to Agarrwal, you can buy a NIFTY index fund, a mid- and small-cap fund, or an international fund.

For debt, experts say, it’s always a good idea to max out your public provident fund because of its lucrative interest rate and tax exemptions. Agarrwal adds, “The RBI has even allowed retail investors to buy government bonds directly through net banking. For the money needed in the short term, term deposits and cash work very well. A good rule of thumb is to have six months worth of cash for emergencies.

For gold, there are gold ETFs that are liquid. Another great option is the Sovereign Gold Bonds (SGBs) which the RBI issues regularly – they have a favorable tax structure and pay an additional 2.5% interest per annum. However, these have an 8 year term and therefore the money is tied up.

Real estate is now accessible in small units through real estate investment trusts (REITs) which resemble mutual funds in structure, but instead of stocks, the pooled vehicle buys real estate and pays out the rent he derives from these properties. dividends.

This is why, explains Agarrwal, “financial literacy is so important – because asset allocation is not a static concept. It is constantly changing with life stage, liabilities, responsibilities and income stream. Also, there are always new products being added that one should try to learn about on a regular basis.

For example, in recent years, many investor-friendly products have come to market for retail investors, such as exchange-traded funds, SGBs, REITs, international funds, and government bonds.

Agarrwal adds, “It is also important to mention that investing is not a race. Your only goal in investing is to make sure your money is aligned with your goals, not to beat your peers/colleagues/friends. »