Don't be poor in 2022
Personal finance mistakes to avoid and tips to get really wealthy
2021, though not as gruesome as 2020, was a year with mixed feelings for all. For most of us, it brought new beginnings and changes. A lot of things happened in the economy and wealth space as well. In an effort to recover from the pandemic, the budget made a lot of new changes. Capital flowed to the country, number of retail investors surged like anything, unemployment fell and IPOs were the flavour of the season.
However, there was some bad stuff too. The volatility index shot up like nothing before, inflation was at record high levels and many people were facing a cash crunch. Here are a few common mistakes people made in such times followed by some remedies and mindset shift guides that can help you take better hold of your finances.
1. Savings deplete if you don’t replenish
2021 wasn’t as smooth as people expected it to be. Many of us had to use up our savings, just to survive. Businesses who were just hanging by were cut off in the second wave. Many were laid off their jobs, although employment seemed to recover in the latter part of 2021. Here is how people think about their savings according to a Times of India report:
Have an emergency fund
Though it may sound basic, more than 60% of the people lack what is known as an emergency fund. Quite intuitively, it is like a reserve fund meant to be used at uncertain times like these. Not only does it keep you at peace mentally, but acts as a buffer that supports you in times of unpredictable losses, urgent monetary requirements and pandemics.
Financial planners suggest having at least 6 months of living expenses in a liquid instrument like a bank savings account or fixed deposit. Giving priority to such a fund over other investments is highly recommended.
Create more sources of income
Protection from the uncertainty of income can be achieved by either savings/investments or another source of income. Most millionaires claim to have at least 5 different sources of income.
You too, can consider building another source of income. Freelancing is something many people have resorted to especially in the pandemic. Established companies and startups are increasingly looking for contract workers to cut costs and stay afloat in uncertain times. The freelancing industry is set to take off in the following years, if it hasn’t started already.
Here is a BCG report which shows how people are freelancing to add to their current income:
2. Hopping on to the bandwagon
As most of you must know, this year witnessed record number of new investors in the Indian equity market. The low price was an excellent opportunity for investors to buy at cheap prices for short term gains. People took interest in investing and the economic stimulus by the government signaling the start of a new business cycle were major reasons. Here is a report proving the same:
Investing in the bull run helps make a lot of gains, but it tricks people into thinking that they know how to invest. Situations let people achieve above-average profits, but not everyone can sustain it. Extreme volatility caused by new age IPOs, foreign investor outflows and the pandemic news isn’t something that newbies are immune to. Such turmoil can lead to unchecked losses.
Invest your way
You have taken the right step by choosing to invest. But just trying to copy finance influencers or acting on random stock recommendations would cause more harm than good.
Everyone has different goals and risk appetites. One strategy of investing won’t suit everyone. It’s important to invest in a way that is consistent with your goals and circumstances. The best way to choose the right instruments is to make a note of your goals, define your time horizon, and establish your risk appetite. Picking assets that improve your overall portfolio in the long term is the right approach. An SIP or ETF would be a good way to get started in the stock markets.
Don’t time the market
You can never say what the future holds. Analysts are often able to predict the direction of markets but no one has been able to do it successfully at all times. Bottom line, you shouldn’t predict the markets either. Trying to achieve an accurate prediction isn’t worth it. It’s better to keep investing regularly and stay invested for the long term rather than speculating, unless you want to trade as a career.
3. Inflation is real
When the economic activity of a country is at a low, money supply is increased to stimulate economic activity in an effort to get it back to normal levels. As only the quantity of money increases, the value of it goes down and the same good becomes costlier than before. This phenomenon, called inflation is one of the most tracked metrics around the globe. Here is a stat depicting rising wholesale & consumer rates of inflation:
High inflation levels of over 6% in the USA and as high as 6.3% in India as of May 2021 indicate that investing needs to be more lucrative.
Measure ‘real’ returns
Emphasis should be placed on correctly measuring our real returns. There is no value in earning 8% a year if inflation is depleting our wealth by 9% every year.
Keeping track of your income, expenses and return on investments can go a long way. Stay abreast with news on the GDP and inflation numbers. This may also help you understand the economy and personal finance lessons better. Make sure that you aim at achieving rates of returns that are covering inflation at least. A prudent approach would be to discard instruments that do not assist your portfolio in beating inflation levels.
Making money and investing is not a hobby or interest, it’s a lifestyle, a mindset. Real wealth is built over decades, not days. Warren Buffet, one of the richest in the world, has made most of his wealth post the age of 60.
Don’t aim to make quick profits and don’t fall for get rich quick schemes either. One of the best practices you can adopt for your long term financial health is to invest regularly without fail. Consistently investing in the right assets in accordance with your goal, and being patient throughout will give you the best returns, since habits and money, both compound greatly over long periods of time.
To conclude, we may say that whether we made money or lost some this year, it has left us with some lifelong lessons. Best wishes for your financial life in 2022!