A Single Conversation that Brought me $100,000 — and my 6 Key Learnings from The Process!
“Tell me and tell me all, What do you do with your money?”
It was somewhere around 2019, and I had been working in a decently paying corporate job for the past 5 years. One day my younger brother, who was still in college at that time, called me and asked me the following question, “What do you do with your money?”
I very positively replied that I have been saving 50–70% of my salary each month and am depositing it in the bank. Shocked to hear this reply, he immediately followed up with another question, “What do our parents do with their money?”
I said that they also save and deposit their money in the bank. He was definitely not happy with either of my answers and replied sarcastically —
What sort of intelligent person do you consider yourself to be if you don’t even know what to do with your money?
He then sent me a list of podcasts on personal financial management and a few financial education books including “The Psychology of Money” and “The Intelligent Investor”. These are the books I had heard of but never bothered to read them. When I went through the material he had shared with me, I realized what he meant to say. Even after working in a top MNC, I literally knew nothing about money, and my personal financial management was practically non-existent.
Let me share an example —
If you keep money in your bank, then it is actually depreciating rather than increasing in value.
It might sound like a very obvious statement to many readers, but to me, this was a revelation. I asked some of my well-educated friends as to what they do with their money, and their response was no different from mine. Then I even asked a friend who was undertaking an MBA from an Ivy League college. He said that he is learning a lot about corporate finance but nothing is being taught about personal finance.
Why no one ever teaches us Personal Finance Management?
When I heard all of this, my bigger question was — “Why did no one ever teach me personal finance management in school or college?”. This is such an important part of our life, yet no one has ever bothered to teach us about it.
My countryside conservative parents always taught us to respect and save money, but they never taught us how money grows. To be fair to them, they never knew about this themselves.
The more I read about personal finance management, the more I was shocked. Hence the next few months I spent a lot of time understanding the economy, the financial markets, the mathematics of investing, etc., and finally began my investment journey!
Today it has been close to 4 years that I have been investing. In my short investment journey, I have already witnessed a global lockdown and stock market crash, a hyperinflation cycle, a bull market, a bear market, and the cryptocurrency hype.
After quite a few hiccups and blunders in my investment journey, it has all shown positive results which makes me wonder what if I had learned all of this earlier!
My 6 learnings about personal finance management!
As I write this article, I know there will be two types of readers — one who would already know all about finance management, and the others who do not know anything about it.
The irony is that the one who know it all would still be very interested to read the article. And the ones who do not know anything would skip or would have already skipped reading the article.
If you are a total novice in this matter, like I was a few years ago, I sincerely suggest you read through the entire article as I share a few important learnings on this matter.
I. Understand the potential — Your Money can earn more than yourself!
If you save continuously and invest appropriately, that day is not far away when your passive income outgrows your active income.
Although it may sound pretty logical at this point, the stupid me never had this realization. And unless we realize the potential of investing, we never spend our efforts in this direction.
We should all have our career aspirations to achieve that status and that corner office, but we must also have a target as to what % of our total income should come from passive income.
II. Differentiate between an investor, a trader, and a gambler
Personal finance management does not mean that we have to be a trader — which is a full-time activity in itself or be a gambler — which is quite the craze these days.
I am only, and only, talking about thoughtful investing.
We often might be tempted to be a trader for quick money, but my experience tells me that you would probably end up losing money if you do not have appropriate experience in this field.
As a beginner, I started with investments in the index fund and eventually expanded my portfolio. I am beginning to see results in the longer term. And we must be realistic with our expectations too and should not expect the money to double within a year or so.
III. Understand the magic of compounding, and have a long-term vision!
Imagine you are earning $4000 and are able to save $1000 every month. You have been investing the same in a stock market index fund, that has on average provided a return of 11.88%.
👉At the end of three years, you would get the equivalent of a 13.5-month salary — i.e. 12 months from your profession and ~1.5 months from your investment.
👉At the end of four years, you would get the equivalent of a 15-month salary — i.e. 12 months from your profession and ~3 months from your investment.
👉At the end of five years, you would get the equivalent of a 17-month salary — i.e. 12 months from your profession and ~5 months from your investment.
(Link to a calculator in case you want to estimate the scenarios specific to yourself!)
Don’t be shortsighted!
The mistake we always make with our investments is that either we are very impatient, or we do not remain invested for long enough. We always have to be in it for the long term to see meaningful results.
IV. Learn Mathematics, and about the economy
Trigonometry or Algebra or Laplace Transform or Differential equations — you don’t need to know any of it. But we must at least understand as to how interest rates work, and how banks use that to our disadvantage.
When talking about the economy, we must know about financial terms such as GDP, inflation, interest rates, etc., and what these mean to us. Also, we must know what are the typical returns for index funds — be it Nasdaq, S&P, Dow Jones, or any other country, etc.
V. Pay for knowledge, and maintain a learning curve
If you have been investing for years and have a sizeable portfolio, there is no harm in paying for subscription services. I personally use quite a few such as Motley Fool, Seeking Alpha, and Simply Wall St. for my analysis, and always try to read what other financial analysts are recommending.
And, like any other field, it is very important to continuously maintain a learning curve. Over the past 4 years, I have spent a lot of time learning about stock markets, real estate, Bitcoin, farmlands, leverage trading, etc.
VI. Always have an investment hypothesis
An investment without an investment hypothesis is just gambling and should be avoided at all costs. 99% of Bitcoin investors cannot explain what Bitcoin and Blockchain is.
Each investment thesis has to be backed by a certain methodology or research, and one must stick to it.
And there is absolutely no harm if one of your investment theses goes wrong.
For me personally, this happened with Tesla. I first started reading about this stock around the first half of 2020, when the stock was trading at around ~$700. Post my research, I was not convinced that I should be investing in this. Eventually, the stock just boomeranged to $2000 and even higher.
But I never regretted not investing in it and stood firm by my hypothesis.
Today it has been close to four years since I started investing, and I cannot stress enough the importance of personal finance management.
If you are already not managing your savings and investments properly, I would request you to sincerely think in this direction.
Appropriate money management can help you reach your retirement fund goal at least 10 years earlier.
Besides, every day I am so grateful for the conversation that I had with my younger brother. I might be the one with better grades, but he definitely has taught me something very valuable and important. On a separate note, he is the one who also convinced me to write on Medium!
I wonder why my mother loves me more than she loves him 😃.
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