I learnt a lot , across subjects like math, physics, history and three different languages, in school. Many of the lessons learnt, gave me a canvas to look at the world and understand it. The lessons though, have not been too useful from an everyday practical perspective.
Frankly, I just wish I had learnt these simple finance lessons in school – it would have definitely given me a significant advantage in life and would have helped me avoid several mistakes (and I would have been far better off, than I am today).
#1. Inflation is here to stay
Inflation means, your current expenses keep increasing even if your lifestyle does not change. We have seen periods where inflation in India was more than 8% pa. At present, inflation is close to 4%-5% pa. At this rate, your annual expense will go up more than 50% in a decade from now.
#2. Saving Vs Investing
A portion of one’s income can be set aside as savings. If you park this money in certain traditional assets (like a bank FD, savings bank account balance or even insurance as an avenue), you will rarely beat inflation. If you doubt it, ask your banker where he invests. The only way to invest for the long term is to park these funds in inflation beating assets.
#3. Investing is a patience game
You will hear some ‘loud mouths’ scream at the top of their voice on the big deal they scored and the outsized returns they made. The same loud mouths will never scream when they lose money. Don’t get swayed by such folks. Remember, investing is a game of patience and it takes time to build your wealth. Quick and easy wins may work in the short term, but they will eventually lead you down a bad road.
#4. Participate in the growth of the nation
One way for normal folks to participate in the growth of the nation is to buy into a bunch of top grade companies and benefit from the growth of these companies. The top grade companies will always grow in line with the GDP and will also beat inflation by a wide margin.
#5. Mutual Funds are here to stay
In India, only a fraction of the wealth of individuals are saved through mutual funds, whereas in developed countries people use mutual funds to invest a significant portion of their savings. As the country grows, more and more of people’s wealth will be channelized through mutual funds as it is a low cost way to participate in the growth of the top tier companies in India.
#6. Plan your taxes well
Your income can be taxed at a full rate, as and when you earn the income. However, as your wealth grows, it is taxed only when there is incidence of capital gains. Moreover, long term capital gains are taxed at lower rates than your income. If you plan your investments well, you can significantly reduce overall taxes and delay the incidence of tax. This has a huge implication on your overall portfolio growth.
I wish schools would teach these six lessons, in addition to all the different subjects such as Math or Geography, so that our children can be better off tomorrow than we are today.