Basic Understandings of Personal Finance

In simple words, Personal Finance means managing your money, which includes Savings, Investments, Banking, Budgeting, Insurance Planning, Family Planning, Tax Planning, Retirement Planning, Loans, and Forecasting. 

We often interchange Investment with Saving. So before proceeding further we must have a clear idea about what is Saving and Investment? Alright!

Saving is keeping aside some amount of money you don’t need now but for future emergencies or needs.

For example, Money in your savings bank account is considered as savings where you get the flexibility to use it as and when required. (It gives roughly around 3% per annum rate of interest which is less than inflation rate as of now). So it is not advisable to keep the excess amount in the savings bank account more than required, as it doesn’t even beat inflation rate and you end up losing the value of your money.)  

{ Note: Inflation means a general increase in prices and fall in the purchasing value of money}.

But nowadays, in some banks, we have an option to opt for an auto sweep facility which gives the flexibility of a savings bank account and gives the rate of interest similar to that of fixed deposits (which is around 5% per annum rate of interest depending on the duration/ tenure).

{For more information on auto sweep facility, you may contact your bank and can get your queries cleared for you.}

Investment is investing your money in buying assets that will make your money grow. It includes investing in the Stock Market, Fixed Deposits, Bonds, Mutual Fund, Public Provident Fund, Debentures, and Real Estate.
{ Note: An asset is something containing an economic value and/or future benefit. An asset can often generate cash flows in the future}.

Fixed Deposits, Debentures, Bonds have less market risk hence they have lower rate of interest as compared to investing in Share Markets, Mutual Funds which have higher market risks and higher returns.

Difference between investing in share market and mutual fund is that we need to have enormous amount of knowledge about market trends, fluctuations while investing in stock market whereas in mutual fund there are expert fund managers who are dedicated for the core purpose of having a track of market trends and fluctuations, so it is advised to invest in mutual funds if you don’t have sufficient time and knowledge about the market. Average return you can get by investing in the share market and mutual fund is around 15~20% p.a.

Most people go through life not really getting any smarter. Why? They simply won’t do the work required.

It’s easy to come home, sit on the couch, watch TV, and zone out until bedtime rolls around. But that’s not going to help you get smarter.

Sure, you can go into the office the next day and discuss the details of last night’s episode of Mad Men or Game of Thrones. And yes, you know what happened on Survivor. But that’s not knowledge accumulation; that’s a mind-numbing sedative.

You can acquire knowledge if you want it. In fact, there is a simple formula, which if followed is almost certain to make you smarter over time. Simple but not easy.

It involves a lot of hard work.

“The best thing a human being can do is to help another human being know more.”

— Charlie Munger

We’ll call it the Buffett formula, named after Warren Buffett and his longtime business partner at Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They are also learning machines.

“I can see, he can hear. We make a great combination.”

Warren Buffett, speaking of his partner and friend, Charlie Munger.

We can learn a lot from them. They didn’t get smart because they are both billionaires. They became billionaires, in part, because they are smart. More importantly, they keep getting smarter. And it turns out that they have a lot to say on the subject.

Buffett’s Only Two Rules For Investing…

“Rule No. 1: Never lose money. 

Rule No. 2: Never forget rule No.1” 

– Warren Buffett

It is possible for the stock market to price things wrong! You can find wonderful businesses on sale often.

Buffett has this famous quote to say about the stock market,

“Remember that the stock market is a manic depressive.”

For any consumer of daily financial news, this will ring true. Equity markets swing wildly from day to day on the smallest of news, rally, and crash on sentiment, and celebrate or vilify the most inane data points. It’s important not to get caught up in the madness but stick to your homework.

Always stay rational.

So what is the Warren Buffett Rule?

Never lose money. Stay rational and stick to your homework when researching businesses in which to invest.

The Market Can Price Things Wrong

“Price is what you pay. Value is what you get.”

In other words, don’t focus on short-term swings in price, focus on the underlying value of your investment.

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

From a man who has made a fortune on companies like Apple, American Express, General Motors, UPS, Johnson & Johnson, Mastercard, and Walmart, this is sage advice.

High Returns With Low Risk is the Key

“Risk comes from not knowing what you are doing.”

The advice here is obvious but often forgotten, particularly after investors have had some success. The temptation to believe that success in one area you know well allows you to easily analyze another is much greater once you’ve had some good returns, but should be resisted with vigor. Buffett himself has kept out of the technology sector for the most part, given his lack of knowledge of the sector. Buffett said it best:

Never invest in a business you cannot understand.”

It’s Easier to Look Back Than to Look Into the Future

“In the business world, the rearview mirror is always clearer than the windshield.”

Buy Wonderful Companies

It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

This famous Buffett quote is very interesting, as frequently, “value investors” will pass on anything that they cannot get for a deeply discounted price. Berkshire Hathaway has taken a different approach and instead focused on investing in the right companies. This was one of Buffett’s early lessons as a value investor, famously told as his turn away from “cigar-butt investing.”

“If a business does well, the stock eventually follows.”

Invest for the Long Term

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

Patience is Key

“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”

“The stock market is designed to transfer money from the active to the patient.”

Don’t be impatient when it comes to your money…

Make Long-Term Investments Over Short Term Ones

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

Investing is not trading and has a vastly different goal, like trading, when done well, is about taking measured risks for discrete periods of time at sufficient volume as to generate profits, and typically involves wild swings in profitability. Investing is about minimizing risk to generate wealth over the long term, not generating short-term profits.

If Warren Buffett had to choose how long to own a company for, it would be this:

“Our favorite holding period is forever.”

Another great Buffett quote in this vein:

“An investor should act as though he had a lifetime decision card with just twenty punches on it.”

This quote is basically saying that you should never buy businesses with the intention of selling them. If you could only buy 10 or 20 stocks in your entire life you’d probably be a lot more careful with where you invest. You’d spend more time looking at the company, and you’d make sure you really love it.

Only Invest In Wonderful Companies

“Time is the friend of the wonderful company, the enemy of the mediocre.”

Invest In Companies That Match Your Values

“Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.’”

“Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”

Get Around the Right People

“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”

“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”

Your Public Image and Reputation

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

It’s More Important to Do Good

“If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.”

It’s OK to Dream Big

“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

On Finding Honesty in Others

“Honesty is a very expensive gift. Don’t expect it from cheap people.”

Buffett once said that:

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

In other words, be careful who you trust. Most of the financial “advice” offered by equity analysts, by any range of advisers, and in the media should be taken with a grain of salt. Buffett and his partner have long worked with the same people with whom they have long histories of trust and experience. Any good investor should do the same.

Appreciate Where You Came From

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

Give Back to Society

“If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”

It’s Usually Best to Just Say “No”

“The difference between successful people and really successful people is that really successful people say no to almost everything.”

“You’ve gotta keep control of your time, and you can’t unless you say no. You can’t let people set your agenda in life.”

Do What You Love

“In the world of business, the people who are most successful are those who are doing what they love.”

Actions Vs. Results

“You know… you keep doing the same things and you keep getting the same result over and over again.”

Choose Your Heroes Wisely

“Tell me who your heroes are and I’ll tell you who you’ll turn out to be.”

“The best thing I did was to choose the right heroes.”

Watch Out for Bad Habits

“Chains of habit are too light to be felt until they are too heavy to be broken.”

Important Links

If you want to improve your public speaking skills, go and check out this article.

Hey ECommerce Entrepreneurs, want to design killer homepage, do check it here.

Want to know more about Stock Market, do check this link out here.

If you are a student and want to know more money saving tips, you shall definitely check it here.

If you want to have a proper guide before purchasing electronics online, you may check here.

Here’s some bonus article for you, go and check it out.

Want to know about Sales Funnel, you may check it here.

Also want to know why you may need marketing, check this out.