Experience may well be the best teacher but the tuition is high. – Burt & Charlie
Of the many Albert Einstein lines that float in the sea of social media, one is – compound interest is the most powerful force in the universe and man’s greatest invention. There is no strong evidence that Einstein actually said it. However, it carries Einstein-like wit and intelligence.
To those who have stumbled upon the term ‘compound interest’ for the first time and are about to open a new tab to look up its meaning – don’t; I will explain it to you.
Compound interest is a simple, fruitful concept. It means that you will get a return not only on your principal amount but also on the accumulated interest that you have earned over time…
Savvy? You bet!
That’s why long-term, sensible investing is the secret of getting wealthy…slowly but quite surely. Compound interest forms the backbone of it.
Yesterday when I embarked upon the 26th year of my life, I pondered, ‘why not start investing? This is the right time.’
So I started to research. I read a few books including The Intelligent Investor by Benjamin Graham, The Elements of Investing by Burton and Charles, Warren Buffet’s biography, etc.
I was surprised that they echoed the same things for beginners – basic rules that you must know before you take a dip in the investing world.
1. Save First
Save. The four-letter word is rocket science to some people. They don’t bother to know it and regret later. It is debatable whether one should invest or save. At the age of 26, what mammoth books have taught me is – save first, then invest. Investing may fulfil your dream of owning a chateau, but savings are your ground. Never bet your ground for anything.
Saving, in general, is a good habit to cultivate. While it can easily fulfil your goals – getting a new vehicle, going on a vacation, buying new gadgets, etc., it can also create a big corpus over long term.
Investing comes after that. You can invest little amounts in mutual funds. A practical way to start: Don’t put too much at stake till you learn the market game.
2. Credit cards are good… But for the lender
Debt, if you have any, should be cleared before you start to invest or save. One of the easiest ways to fall into debt is by opting for a credit card.
A credit card is great…for the lender. Last year, my flatmate opted for an elite bank’s credit card. Unfortunately, he tucked it in his wallet all the time. When the latest Apple toy was launched in September, he was ‘graciously’ allowed to make low monthly payments for the 128 GB version. Do you think he settled his ‘iDebt’ and never used the card again?
In the honest words of Scott Adams, the creator of Dilbert, ‘[Credit cards are] the crack cocaine of the financial world.’ Once you’re addicted, your obligations continue to accumulate until you are slapped with a legal notice.
Every successful investor advocates that one should not spend money he hasn’t yet earned.
3. Minimize taxes
People sometimes go too far to avoid taxes. There’s a reason the old houses in Amsterdam are narrow and tall. People built them that way to avoid property taxes – which were based on the width of the house.
If you’re a foodie who likes to try cuisines from around the world, you might have heard of Tuscan bread. Do you know how it was first made? The Duke of Tuscany imposed a heavy tax on salt. Hence, Tuscan chefs decided to produce more baked goods that contained almost no salt – to escape taxes.
But I learned that avoiding taxes is not a smart move. It will bring you trouble sooner or later. What is smart is to minimize them. Especially when we have section 80 C, which provides deductions on investments. Hence, it is a great way to boost your investments and minimize taxes.
It is a fact that investing, if done right, can create tremendous wealth. But how to do it right? Good investing is not a gift; it can be learned over time. A beginner doesn’t even know enough to know that he doesn’t know. He starts by reading theory but grows only through experience. Failures are an inevitable part of success.
The most important thing: Do not let anyone tell you that investments are not for regular people…or young people…or that you can’t understand the game.
Even the most seasoned investors can’t predict stock movements accurately all the time. The key to success is calculating the probabilities and developing a plan to increase your chances of profits Patience and perseverance are the major factors for success. The long-term investor who learns investing tools and makes a sensible plan will likely have the best success.