It is always better to start early to save and invest, but remember that it is never late to get started today; no matter if you are 20, 30 or 40 years old. Here are some very basic tips and ideas on how to start saving/ investing money for your future.
Understanding what are assets and liabilities:
First you must know and understand what are assets and liabilities?
- Assets in simple terms are those which will help you in making more money or will earn money for you. For example, property, bonds, stocks, gold etc are assets.
- Liabilities are those which will not help you make money. For example, car, bike, mobile phone etc are liabilities.
The basic rule is you should start increasing your assets and decreasing your liabilities.
What are the different savings option available?
- Savings can be broadly classifies into short term (0 – 5 years) and long term (more than 5 years). Short term savings are the usual cash savings (piggy bank or in savings account), fixed deposit, and recurring deposit. Long term savings are investments done through mutual funds, real estate.
Short term savings are options where you work and save money for future. In long term savings options, your money will start earning for you.
- With cash savings just in your piggy bank at home is easy to access during emergencies; however there will be no returns from it. If you save money in savings account it is the same except that you will get a very small percentage of money as interest. The risk of losing your money is either very low (money getting stolen from your wallet) or none (money in savings account).
- Fixed deposit and recurring deposit will help you earn comparatively a much higher interest on your money than the usual savings account. In fixed deposit you put in money one time for a fixed period of time and in recurring deposit you have to keep saving a specific amount of money every month. In both these cases, the availability of money for emergency requirements is immediate and risk of losing your money is nil.
- In mutual funds money collected from many people are managed by a professional fund manager to be invested in stocks, bonds etc. You can either invest one time or monthly as SIP (systematic investment planning). It will take a few days to get money for emergencies and there are some risk of losing your money when investing in mutual funds, but if researched carefully and invested for longer period of time, your money should be safe. The returns are comparatively higher than the short term options.
- You can invest long term in real estate, like buying a house or land. However, if you buy a house and stay in it or buy a land and just keep it, then it will not help you make more money. On the other hand, if you buy a property and rent it out, then it will help you earn money. It takes a long time, sometimes in years to get money from real estate investments and the returns also vary depending on whether you live there or leave it for rent.
- You can also invest long term in share market. This not only requires skills, time and patience, but it also requires you to be ready to lose your money (sometimes the entire amount invested) if the market crashes. Investing in share market definitely has its pros and cons in both extremes – you can earn very high returns or nothing at all.
Now that we have seen what all the different savings and investment options are, we will see how to divide your money in them for your financially stable future in the next part.