6 Personal Finance Ratios You Need To Know

 

6 Personal Finance Ratios You Need To                                        Know 

These simple equations can help you make better financial decisions and grow your wealth — even if you're not a math wizard.

Want to measure your financial health?

Personal finance ratios, as well their closely-related cousin “rules of thumb,” are a great starting point.

In a matter of seconds, you can benchmark your current financial situation and habits to make better decisions about your financial future. 

But when it comes to measuring your personal financial health, ratios don’t tell the whole story.

In this post, we’ll take a look at a few important numbers, dates, rules of thumb and ratios that can help your improve your financial decision-making. 

The Two Financial Milestones You Should Track

 Two of the major financial milestones in your life are the date you become debt-free and the date you reach financial independence (when your investments can cover your living expenses for the rest of your life).

Tracking these dates is powerful because they take your entire financial picture into account — including your current assets, liabilities, income and expenses — giving you one number that shows exactly how you’re doing. 

Note: For getting out of debt, track the number of months it takes to become debt-free outside your mortgage. For financial independence, track your expected age to reach your goal.

With these numbers in hand, you can make financial decisions with one simple question in mind:

Will this increase or decrease my target date?

How To Calculate Your Debt Payoff Date

Tracking the number of months it will take to become debt-free should be the first thing you do on your journey to financial independence. 

But most people avoid looking at this number. Which means they never gain clarity into what they should do. 

Calculate Your Financial Independent Date

The rule of thumb for reaching financial independence is that you need to save 25X your annual expenses. For example, to live on $40,000 a year, you’d need $1 million.

Traditionally, this is outside of any other income sources (such as social security, work from part - time jobs, etc…).

While you’ll want to calculate your target financial independence date, the 25X rule of thumb is quite helpful in decision-making. 

For Example, say you have a taste for luxury cars. This may increase your expenses by $200 a month or $2,400 a year (compared to what you’d pay for a non-luxury car). You can afford it, so no big deal, right?

Well, just know that to keep this up in retirement you’ll have to save an additional $60,000.

It’s a good mental exercise to go through your expenses this way. Take a monthly expense and calculate it by 25X; that’s how much more you’ll need to save to continue to afford this expense.

Helpful Personal Finance Ratios

The Most Important Financial Ratio

What’s the most important financial ratio — the one financial ratio I always make sure to check?

My savings ratio.

This is easy to calculate:

Savings Ratio = How Much You Saved ÷ How Much You Made

For those starting out, it’s better to track this number on a monthly basis. The formula looks like this:

Savings Ratio = How Much You Saved This Month ÷ Your Monthly Income

It’s also important to define what “saving” is. My preference is to count only savings I invest.

 What’s the ideal number you should aim for? Some experts say 10%. Others say 20%.

My preference? Don’t worry about the perfect savings ratio today. Instead, start to track this number.

Then, aim to increase it. If you increase it by 1% every three months, in four years you’ll be saving 16% more than you are today.

2. Expense Ratios Of Investments

A study by the Center for American Progress found that the average 401 K plan charges a 1 percent fee. 

Another study by the ICI found the average mutual fund expense fee is 0.63 percent.

Why are these numbers important?

Look at this example, from the Department of Labour (as relayed by Nerd Wallet):

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

That’s why it’s important to know about any and all fees. But they’re called hidden fees for a reason: because they’re hard to find.

3. The Emergency Fund Formula

How big is your emergency fund?

To find out, take your:

Cash on Hand ÷ Monthly Expenses = Emergency Fund

The general rule of thumb is that you want an emergency fund of at least three months but no more than six months.

An emergency fund that’s too small puts you at risk of not being able to deal with a financial setback. But an emergency fund that’s too big means you’re losing money to opportunity cost.

However, instead of worrying about rules of thumb, it’s better to answer this question:

How much cash do you need to feel comfortable and sleep well at night?

In a study titled “How Your Bank Balance Buys Happiness", researchers found:

“Having readily accessible sources of cash is of unique importance to life satisfaction, above and beyond raw earnings, investments, or indebtedness.”

Everyone is unique. My preference is to have as little as possible. I’ve gone with an emergency fund as low as one month. However, I’m a personal finance geek who likes to optimize everything.

Others may not be able to sleep well at night with just one month of savings tucked away. Instead, they may prefer six months (or even 12 months).

One tip to help you calculate your ideal emergency fund is to imagine your financial doomsday.

For Example, answer the following question:

What would I do today if I lost my income, the value of my home cratered, and my portfolio dropped by half?

By thinking through your actions in this scenario, you’ll get a clearer perspective on the role an emergency fund would play in your life.

4. The 28/36 Rule

The first thing you need to know about the 28/36 rule is that it’s not a rule used in financial planning. Instead, it’s a rule lenders use to determine how much debt you can “afford.”

The rule states that you shouldn’t spend more than 28% of your monthly gross income on housing (which includes principal, interest, taxes and insurance). Then, your total debt payments (housing + all other debt) should not exceed 36% of your income.

It’s important to look at this ratio from both a lender’s and consumer’s perspective.

For lenders, the purpose of the 28/36 rule is to determine the largest amount of debt a person can have.

In other words, the formula identifies the largest amount of debt banks think you can manage with a reasonable chance of paying it back. Remember, they want to loan you the most they can, as this maximizes the bank’s bottom line (but not your finances).

So what’s a better way to determine how much house you can actually afford?

5. How To Determine Your Asset Allocation

A general rule of thumb for asset allocation is:

Stock Allocation = 100 – Your Age

Specifically, one should invest in a percentage of stocks equal to 100 minus their age, with a bond allocation making up the remaining balance.

For example, a 40-year-old investor would invest in 60% stocks and 40% bonds.

While one can argue this advice is outdated (I would agree), it still holds some value as a starting point.

There’s clearly a misunderstanding of asset allocation among investors both young and old.

As for this formula being outdated: we have better models today to maximize return and minimize risk. Nonetheless, the ratio teaches an important concept, which is that your investing strategy should get more conservative as you age.

Final Thoughts

Peter Drucker famously said, “What gets measured, gets managed.”

Another quote of Drucker’s that’s not nearly as famous but just as true is, “There is nothing so useless as doing efficiently that which should not be done at all.”

In other words, it’s not just about tracking your personal finances: it’s also about tracking the right things and using that information to make informed and intelligent decisions that improve your life. 

3 Important Financial Goals You Should Achieve Before 30

 

3 Important Financial Goals You Should  Achieve Before 30

The time between your 20s and 30s is probably the one with most adventure. Vast majority focuses on their careers and degrees, but there are certain things you should focus to achieve true financial freedom and independence in future. Maybe you have done pretty well in managing money, or maybe you have no idea how to, because you have just started to make money. Today, I’m going to list out 3 important financial goals you should achieve before 30.

1. Build Your Own Wall

Money makes money; and the money that makes money, makes more money.

-          ----------Benjanim Franklin

I remember when I started working at a very early age, all I had in my mind was to buy a new latest Nokia N73 phone. The cost of buying that phone was probably 10 or 20 times my monthly salary. However, I still wanted it for some silly reason.

Finally when I accumulated enough money to buy it, I found it very difficult to spend it in one go. I couldn’t imagine myself buying a depreciating asset with months of salary. Even though I had no idea what a real asset or depreciating asset could be at that time. I still knew I could use this money somewhere more sensibly.

After several years, I’m glad I didn’t buy that expensive phone. Had I purchased that phone, the value would have become zero till now. However, that was not the only good thing, it also helped me get a kick start to build my own capital. Although I spent some amount of it, but I somehow managed to invest the remaining in places where it could grow.

The problem

However, not many gets the luxury to save with patience and convert it into a capital with their own hard work. I have seen many people who hardly have any cash in their bank accounts. Forget about building a capital. If you’re among the group who don’t have enough savings to keep aside then you probably need to work hard. Or you need to upskill yourself to leverage your time and earn more, to increase your income.

For the remaining who are salaried and can easily save, faces another problem. Where to invest? Our Indian culture definitely teaches us to save money but it never teaches us to invest wisely. As soon as we save a significant amount, it is either spent on unwanted luxuries or on depreciating assets whose value drops to 0 in few years.

Today, that small amount that I invested has grown to a much larger corpus (my wall) with the help of compounding effect and it keeps on growing at a much faster pace. Seeing that amount growing steadily gives immense satisfaction and when I look back, that younger me took the best decision of life. A small fund created to buy a phone is now my wealth with few more zeros added to it.

2. Education; an enlightening experience

My poor dad often said investing is “risky“. But my rich dad said being financially uneducated is risky!

-          ---------- Robert Kiyosaki

Can you explain what a Mutual Fund or Stock Market is, to your parents or someone elder than you? Or any concept which is new to someone who is double your age? Well we can, but the amount of time they’ll take to understand the concept will be much higher.

Think about technologies like a mobile phone. Why do old people resist using new technology like the latest phones and computer so much? The answer is, the older you become, your capacity to absorb new information reduces drastically.

In fact, in a study, it was concluded that new information-processing speed is highest in a human during their 20s. So if you’re in 20s, this is the best time to learn how a Mutual Fund works or how to file for a tax yourself. How compounding works or what’s the effect of inflation in long term. Anything that you’re curious about now, explore it and master it.

Few years down the line, these concepts will look more like technical terms. The more you ignore, the more dangerous it will be. You have the internet and so the access to all the books for free. Remember, the older you become, more dependent you’ll be on others if you don’t learn it now.

To make it simple, information-processing speed becomes considerably slow during our 40s and keeps on reducing thereafter. However, the best part is that it doesn’t mean you become dumb. The same study also indicated that old people are able to rely on their real knowledge, experience and expertise. Hence the power of compounding works in knowledge too. 

3. Budgeting; too boring?

Many people are often turned off by the simple term budget. They associate it with limitations and a lot of hassle and headaches. They may feel like they are too poor to budget or have other budgeting excuses. However, little do we know, it is a trait of wealthy people. Corporations do corporate budgeting, government does government budgeting, then why don’t you?

How does the story of a common middle class person look like? Something like this: They receive their salary at the beginning of the month, 30%-50% of it goes to their landlord for rent or for home loan EMI, 20% of it goes to the local grocery store, 30% goes to random bars, luxuries, and ecommerce sites and the remaining 20% is eaten up by their desires.

By the end of the month, they are left with little to no money and waiting for the next payday. Sometimes they even stretch their spending limits though a credit card/loan or by borrowing.

This is the worst way of managing money. It simply indicates that your banker, landlord, local shop owners and ecommerce sites here are the real winners. They are attracting you to buy things you don’t need or can’t afford and you’re falling into that trap just because it’s on discount or he/she too have it so I should have it too. 

Moreover, banks take the money from us automatically in the form of EMI. The real meaning of EMI is "Equated Monthly Installments" but 95% of the people think the full form of EMI is “Easy Monthly Installments”. Why? it’s because the banks make it look easy when you go to buy but ask anyone who actually pays EMI whether it’s actually Easy.

The problem again

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”

-          ----------- Will Rogers

We need to understand the fact that banks are not our friends. They are in our society to do business and make money. Banks are “For-profit institution” and government supports them for two reasons. 

1. They give revenue to government in the form of tax. 

2. They help in increasing the spending power of common people which eventually helps in increased GDP.

However, increased spending has no direct relation to our income. Banks are giving us the power to spend more and stretch our spending, however our productivity and income remains unchanged. The earlier we understand this concept, the better.

Hence, if you want to be a winner in the game of money, follow this golden rule: "Pay Yourself First and Do It Automatically. If you stay away from it, that means you want to stay away from financial freedom and happiness.

I was shocked when I did my budgeting for the very first time and realized the amount of money I spent on silly things. Try making payments for all your expenses from a single source like UPI or Paytm for a month sincerely then go back and do the math after a month. You’ll definitely be surprised how fast money flows outward.

Unless and until you don’t do a strict budgeting and stick to it, you’ll have a hard time getting your finances in order. If you don’t do it now, how can you expect to become a master of it later?

Countless self-made millionaires have told me that the journey to wealth is much more satisfying than the destination. When they look back over their history of building wealth, they recall constantly setting economic goals and the great happiness gained from achieving them.

Thomas J Stanley, the person who did PhD in researching wealthy people’s lifestyle wrote in his book The Millionaire Next Door.

To Conclude

Start saving small portion of your income regularly by paying yourself first. 

For ex. If you deduct even 5% of your salary every month for investment, you’ll hardly notice any impact of it. Then steadily keep increasing it. The amount you’ll accumulate over time will be enormous. Keep yourself educated about the important topics that matters, read books, blogs like this. Finally, start creating a budget by spending some time every month or quarter to control what you have before it becomes history.

Home Loan vs Investment in India

                          Home Loan vs Investment in India

The average price of a 1BHK (1 bedroom hall kitchen) house in Mumbai is approx Rs.70 lakhs to Rs. 1 crore. The further you go towards Mumbai city (towards Colaba), the price keeps on increasing upto average Rs. 3-5 crore. On the other hand, a graduate/post graduate with around 3-5 years of experience (in late 20s) earns around Rs. 30k to Rs. 80k a month. Hence, this question, should you buy a home loan or invest in this city of India. My Home Loan vs SIP comparison.

“Is it possible for a middle class person to buy a house in Mumbai with their own salary?” My friend asked. I think this is a very important question from finance point of view. However, 99.99% of individuals who say a “Yes” to this question comes up with only one solution – Get a home loan.

Really? 

How can a person who earns a mere Rs. 30,000 monthly buy a house worth Rs. 70 Lakh. I’m not trying to demotivate anyone who think he can. 

However, 

1) I’d like to give a broader perspective on why the prices are so high even when people are not able to afford it, 

2) Is it really an investment, 

3) Comparison of home loan vs investment options in India and 

4) Alternative solutions to this problem.

My view on why the prices have inflated so much

Now, let’s suppose you’re a hard-working engineer at a multi-national company. You have a few years of experience, and earn about 7 lakhs annually. However, you are not from Mumbai. If you’d like to stay here and buy a house then the only house you can afford within Mumbai’s city limits is – a 1RK. I’m dead serious. If you are from Mumbai, I’m 100% sure you’re able to relate to this and validate this claim.

A 1RK in Andheri will cost you about Rs. 40-50 lakhs (I’m 100% sure I’m quoting a less price here). If you’re lucky, it’ll have an attached bathroom. With Rs. 7 lakhs per annum, you can afford to pay its EMIs for 25 years.

The alternative solution to this would be to go outside city limits, like Vasai-Virar or Ambernath-Panvel. Where you can get a 1 BHK for that amount. But are you prepared to commute long distances to your work place, by changing 2 trains and spending a few hours?

Though I’m a not a pure Mumbaikar, I stay with my parents in a Mumbai Suburb, who bought this property about 25 years ago. Today with my salary, I can’t even purchase a house in the building where I stay ! And its an ordinary middle-class building, not some Hiranandani or Lodha-style complex. So now, you will have a question, why the prices are so high and who buys it?

Real reason why the prices are so high

All this has been wrought upon by the nexus of politicians and builders, who’ve pumped black money and inflated land prices in and around Mumbai. There is one more party who is to be blamed for high prices which is mentioned below. In the absence of a government regulator, land prices and their funding mechanisms are unchecked, resulting in unaffordable prices for middle-class people.

We’re facing a similar problem which USA faced before the 2008 crises. If you’re someone who don’t know the real reason for the 2007-08 recession then you should definitely read it once as it was the most latest recession the world witnessed.

In short, the real reason for 2007-08 recession was people assumed the prices of houses/real estate will always increase with time. The theory that land is a limited resource and the population only increases which means the price of land will go up proved to be wrong when people started defaulting on home loan EMI and the banks were forced to do foreclosures which led seto increase in supply of houses when nobody had money.

Bottom line is that, in my opinion the prices of real estate will not increase the way it did in last 20 years. The reason is salaries and income have not gone up in proportion to the way home prices have gone up. The minimum wage paid to labor in the year 2000 was Rs. 4000 and now it’s around Rs. 8000/10000 or less. The minimum salaries, tax bracket have also only doubled but the housing prices have increased significantly which cannot happen for longer period.

Is buying a home loan EMI really an investment?

Let’s do a simple calculation

Let’s assume there were 2 friends Rocky and Jacky. Rocky did a graduation in finance hence he had little knowledge about stocks and mutual funds hence decided to put his money there for investments. Jacky was an engineer and wanted a smooth life hence bought a home via EMI.

Jacky bought a house for Rs. 40 Lakhs with other charges his total cost came to Rs. 43 Lakhs. He made Rs. 10 lakhs as down payment and for remaining Rs. 33 Lakhs he availed bank loan at 9.5% interest. For which he pays an EMI of Rs. 29691 for 20 years.

Assumed cost of the house = Rs. 40,00,000

Stamp duty and registration fees( assumed 7% on Average) = Rs. 2,80,000

Bank processing fee and MOD etc.., assumed at 0.5% = Rs. 20,000

Total Cost = Rs. 43,00,000

Down payment = Rs. 10,00,000

Loan taken = Rs. 33,00,000

Home Loan EMI = Rs. 29,691

Average Home Price Inflation = 9.5%

Total Interest paid = Rs.  38,25,830

Total Cost of home = Rs. 81,25,830

Market value of house after 20 years (assuming 7% returns as per past record) = Rs. 1,54,78,737

Now let’s look at how Rocky’s investments have been:

House rent per month (Assumed the cost of the house to be 25 times the annual rent paid.) = Rs. 13,500

Interest-free advance to homeowner (5 Months’ rent) = Rs. 67,500

Initial investment of Rs. 10,00,000 excluding rental advance towards mutual fund = Rs. 9,32,500

Average mutual fund return = 15%

Monthly SIP = Rs. 16,191

Corpus generated after 20 years = Rs. 3,81,51,359

Other important points worth noting

• House is not going to give now return more than 7%. This is because on peak already. Only if you purchase a land in a fast developing area then you can expect a higher rate.
• I’m not counting rent as an income as you’re living in the house.
• Government of India is trying everything possible to increase the GDP hence the consumption of Indians will grow. To enjoy the benefit of this growing economy, you can invest in mutual fund and fetch 12–20% return.
• You will not have any liquidity issue as you can sell Mutual Fund Unit in shorter term whenever you have any requirement like son/daughter’s study expense.
• Home will go in bad shape in 20–25 years till the time you actually own the house. I’m not considering the amount you’ll spend on renovation and repair.
• If you are working you will have flexibility to change area, city or even country.
• In case of bad time, you won’t have pressure of paying loan EMI consistently for 25 years.
• Jobs are not stable the way it used to be in the past. Your father may have worked for the same company for 20 years but look at how people are changing jobs.
• Last and important point worth noting. A person who pays home loan EMI hardly gets any moving for saving. This is because a large chunk of their salary is debited for the loan EMI. Which means they are putting all their eggs in one basket. However, you have flexibility to choose different types of Funds such as government bond funds which gives guaranteed returns. Even if there is a recession, 20 year is more than enough to recover easily.

However if you are not very ambitious (not looking to start own business, think different to uplift the standard of living) or does not want to take risk and you have surety to give loan back even if you don’t have a job. Then you can go with the loan option. However, only to those specific locations which are being developed faster.

Conclusion

People were able to afford buying houses or properties easily 15-20 years ago through salaries or business incomes and by keeping extra cash at home. For example. If the monthly salary of an engineer in the year 2005 was Rs. 20,000 (Rs. 2,40,000 annually). They could easily save for 4-5 years and buy the house on cash. Because the prices at that time were well within the reach of a common-man. Since the demand for property was high and so the prices increased drastically. It’s not the case anymore. You have to go through the home loan route now because you can’t carry so much cash at home. Also the way we’re spending nowadays because of Amazon and Flipkart doesn’t make it possible either.

The mindset of Indian consumers have always been to save more and spend less. However, this mindset of Indians are shifting with their lifestyle more like the westerners (USA) where the consumption/expenses are higher and low savings. Even a person earning Rs. 15,000 monthly salary will have a mobile phone worth Rs. 30,000 and an Amazon Prime or Hotstar subscription.

The impact of social media has been huge, especially on the way we’re spending on vacation trips and showing-off. It was not the same case in the past. Think about it! This impact is more on younger generation who think saving is boring

The India economy is following somewhat similar to the trends USA did in 1990s. Hence, my analysis concludes that the price of property will increase at a much slower rate in next 20 years as compared to last 20 years.

Investing in Mutual Fund would be the best idea to take part in this high consuming new society of India. Because when the companies make more profit, the shareholders’ make more profit. Hence the share price increases and so the Mutual Fund gains.

How to Invest Your First Rs. 1000

 

How to Invest Your First Rs. 1000 in Stocks – Step by Step Guide

Warren buffet once said: “If calculus and Algebra was required for investing, I would have to go back delivering papers”. One common reason why most people fear to invest in stock market is that they feel it’s too complicated or you must be highly qualified for it. But if you educate yourself with some basic Stock Market Knowledge, you’ll realize that the most important element in investing is common sense.

Its said that “The first step is always hardest”, so I’ll try to make your first step to invest in stock market simple. Investing is a must because “If you don’t find a way to make money while you sleep, you will have to work until you die”. And this makes a lot of sense if you wish to remove your money worries and achieve early financial freedom in your life. Work hard, save and invest in your 20s. Make the money work for you and relax in your 30s,40s and beyond, instead of working for money for your whole life. So its your choice whether to depend on your children after retirement, or be financially independent by yourself.

Since you’ve taken the first step to invest in stock market. Lets dive right in.

Step 1. Open your investment Account.

Once you choose to invest in stock market, the first thing you will need to do is open a Demat and trading Account. As there are various sources and platforms available, so people find it difficult to select the best one. They just waste months, to choose a brokerage account, which may not have any impact in the long-run. But on the other hand, they don’t even spend a single day to search good companies, which actually will have a huge impact in their financial lives in the long-run.

So just to make it simple, start with a discount broker, who charge lesser as compared to others. Thus, you can buy any number of stocks, hold them long and whenever the company pays dividends, it will directly get into your bank account without any brokerage charge. The only time you pay brokerage is when you sell the stock. However, I hardly sell any stocks because the big money is made not while buying or selling. The big money is made while holding the stocks. If you understand the magic of dividends then you’ll realize what I’m talking about.

Step 2. Decide : To Trade or To Invest?

Once you open your Demat account, the next important step you need to take is to decide whether you are interested in trading or investing. People get confused in these but there’s a huge difference.

Suppose, you buy a house at 9AM today, do you call and ask your broker at 10:43AM about its selling price? I bet you won’t. Because, if you are investing in real estate then you are thinking about the long term passive income, through the rent. Or sitting on it for decades to make huge profits. This is called real investing. Whereas, in trading people mostly focus on frequent buying and selling of the stock. This is because of the mindset people have created where they buy and hold real estate for long term. But in case of stock market, majority people consider trading because they want to get rich quickly (which never happens). But once you buy and hold a stock of good company, you will earn more wealth through the Compounding Effect. Very few people understand this.

Step 3. Start with One Company

Once you’ve decided that you’ll actually invest for long-term, then I have some simple advice for you that may help you to begin the journey wisely. First of all, just pick the best company and invest your first few thousand rupees. Many times people get the urge to diversify even their smaller amount into 10 different companies. That’s when they start speculating. They consider each stock as a lottery ticket with the hope that one of them might win big profit. But these are wrong practices that every beginner makes and fail in the beginning. So to avoid failure at the beginning, just avoid speculation and diversification when you start.

Another reason why people diversify their portfolio? It’s because they copy portfolio of bigger investors, who tend to diversify their huge wealth one by one through their past experiences and understanding the business. But this copy and paste won’t help us. The reason is very simple. Rakesh Jhunjhunwala invested in Titan in 2003 and that’s it.

He didn’t invest in 15 companies together in 2003. Secondly, he have already made 60,000% returns so far. His networth more than Rs. 25,000 crores. So his risk appetite (the ability to take risks) in new stocks is very different from you and me. He can invest in a poor company that has high chances of failing because he has a lot of money. But you and me cannot lose money in the beginning. If we lose our initial capital, we lose all the wealth that it was going to create for us in the future with the power of compounding.

You can surely select the companies who you think has the ability to perform best in future by understanding their business. There’s a quote of Peter lynch, “A stock is not a lottery ticket behind every stock, there is a business find out what it is doing”. But most of the people have no idea where do we analyze and buy the good companies in real.

Step 4. Understanding Business

So just to make it easy to you, I use stock screeners like screener.in or Tickertape.in. Here, you can filter the good stocks and understand their business. There are thousands of known and unknown companies. One of which is reliance industry that is diversified with different products. But, just investing because you are known to the name, won’t help you in the long run. The most important thing is to understand the business—where your money actually gets invested, how they make money and how they plan to grow in future.

Now since  have different business like Jio, Reliance trends, Reliance oil & refinery, etc. They are group of companies and that makes it difficult to analyze. It would be far better for you to invest in index funds instead of such companies, because Index have 0% chances of bankruptcy and also ensures you good consistent returns. But, still if you prefer to invest in companies like Reliance Industries, then first you need to know their business. And how do they earn profit. You can either open investors presentation or annual reports, which would help you understand this.

If you open the latest annual report of Reliance, you’ll realize that in Reliance Industries’ case, they have 6 earning segments. And they make most of their profits through oil & refinery business which is from petroleum sector. Then next, through retailer and digital marketing. But most of the people invest in reliance just for Jio. But they’re unaware of the fact that it’s just a small part of the whole group. If their refinery and petroleum perform poorly in future, the stock is going to be down. So picking a Tata Group company is far better because they’ve separated all their businesses such as TCS, Tata Motors, Titan, Tata Consumer Products, etc. So if you feel one of them is going to do good in the future, you can bet on that one particular stock.

So you can choose simple companies whose products are known and you can easily understand their business and growth. For ex. Pidilite industry which is not so popular, but their products like Fevicol, Fevikwik are widely used. They may not be as popular as tech companies but still have lot potential to grow and growth continuously. There are no competitors for Pidilite and they’ve been maintaining their market leadership since decades. This is visible in their stock price. If you check the long-term history of Pidilite Industries’ stock price, you’ll understand what I’m talking about it. Just Google Pidilite Industries share and click the max button to check its 20 year stock price history.

So invest your ₹1000 wisely by analyzing the company’s fundamental and not just by popular names. Don’t think of it as a small amount of Rs. 1000. Think of it as the beginning of your 1st crore. (Titan went up by 600 times in last 18 years. So Rs. 1000 invested grows to Rs. 6,00,000.)

Step 5. Take a Simple Idea and Take it Seriously

Hence. it’s important that you choose a company whose business could be easy to understand, as this could help you stay invested for long-term and the management can also stay focused on their core business. It might be growth oriented and long term business that tries different methods to develop their company. Warren buffet says, “I want a simple business easy to understand and then I can see in general way where they will be 10 years from now, If I can’t see where they will be 10 years from now, I don’t want to invest”.

For examples, if you see Reliance Industries, there’s renewable energy sector or other tech sectors, where we have no idea where they’ll be in 10 years. But, if you take Good day biscuits, Maggi noodles, Fevicol or any other daily products then they have high chances of predictability. And your odds of losing money is very less here. As they are growing continuously since decades. They’ll continue to get bigger with the compounding effect.

Even warren buffet had said, “Take Wrigley’s chewing gum. I don’t think the internet is going to change, how people are going to chew gum or I don’t think technology will change how people drink coke or how they shave.” That’s the reason from many years, Warren Buffett has continuously been in the list of top 10 richest investor.

Final Words

Wealth is created through concentration and retained through diversification.

There’s no point diversifying first few thousand rupees. It’s important to focus on business fundamentals than just looking at the stock price.  If you fear so much then it’s better to just go with Index funds instead of picking individual stocks. Because if you just buy random stocks by looking at their price (that most people do), then you’ll forever remain in the game of speculation. And you’ll never invest meaningful amount and will never create wealth too. “Games are won by players, who focus on the playing field, not by those people whose eyes are stuck on the scoreboard”. So, you need to focus on understanding the business and learn more about timeless investing principles than just speculating with the stock price. This will help you to earn wealth for long period and give you early financial freedom.