Sunday, August 28, 2011

A New Creative Investor

How a common man became a creative investor

This is a story of a 28 year old man who just got married. Suddenly the responsibility on his shoulders multiplied. He still did not have any investment plans in place so money was a problem. He was not prepared for an added load, ‘yes’ he wanted to marry his love but he never estimated that it would also translate into added responsibilities. Life is not simple. The money kept on flowing-out heavily on the weekends. At the end of the month there was always a money crunch. His salary was decent but still there was a money problem. He always thought that his package was reasonable but suddenly he realized it is not enough. Whatever he is earning is all getting spent and drained. He needed to put a tap to the overflow.

First signs of a creative investor and sound investment plans
He decided to start tracking his expenditures. The objective was to know from where the money is getting drained. He wanted to know a pattern. His wife also supported his cause. From that day onwards they started noting all expenditures. They paid bills like house rent, electricity, news paper, milk, car wash, house maid, groceries, vegetables, movies, dining, everything. In next three months time the pattern was beginning to show. A creative investor was in the process of making his take a big step forward towards financial independence.

Now they know that most of their money was spent to pay his compulsory bills like house rent, electricity bill etc on which they had little control. They decided to reduce their expenditures related to groceries, petrol, movies, dining out, house decoration and unplanned expenditures. Then they decided to fix a limit on all of his expenditures and follow this regime for at least next two/ three months. They wanted to observe the feasibility of his investment plans and analyze the results as a creative investor. He and his wife dedicatedly followed the investment plans and the pattern was soon beginning to show. They were ecstatic.

He observed that he has started to save on average Rs 4,500 per month. Both he and his wife quietly celebrated their gain. They had a nice dinner in a beautiful Chinese restaurant and had a pledge that they will continue to maintain the same pace of savings. They returned back home with immense satisfaction. That creative investor deserved his peace.

But, the creative investor was not satisfied with this gain and investment plans. He knew that some thing was missing. Somewhere, the links are not joining. He cannot pin point the reason of his restlessness, but he kept reminding himself that some thing was missing. The circle was not complete.

Not long, he got the opportunity to visit France. Unfortunately he could not take his wife with him as it was an official trip. His wife understood. The visit to France was a great experience and Eiffel tower, louver museum etc was perfect. When he was coming back to India he informed his wife that he has managed to save some 450 euros (Rs 30,000) in this visit. They will have a nice sofa set for their house. He was excited and his wife was jubilant at the thought of buying a brand new sofa. As soon as he reached India, the first thing they did that weekend was to buy a nice sofa for their house. They celebrated, and the satisfaction was heavenly. That night the man had too many thoughts running in his head. Just few days back he had 450 euros in his kitty. In few hours he managed to spend it and he is back to square one. Yes, sofa was important but again he felt some thing is missing, that missing link. He asked himself “How can I keep on buying my requirements but my bank balance should not get deplete?” Few days back he was richer, he asked, how can I continue to grow richer each day. He knew that if he is dependent only on his salary, he cannot get richer each day. This is the realization that made him actually transform from a ordinary person to a creating investor with a strong investment plans.

Their biggest problem was, whatever they were saving will soon be spend on trivial things. What about the long term requirements and long term investment plans? They were saving but ultimately all saving were spent on buying things that were not so important as far as long term requirement was concerned. This made the man (now a creative investor) very restless. He knew that he needs to get to the step-2 now.

The creative investor’s observation was dead right. He was indeed spending all his savings on trivial things. The result was same, his net worth was not growing, and either it was stagnant or getting depleted. Whatever he was earning, ultimately all was getting spent. He decided to develop a more sophisticated savings and investment plans. He decided that not only he will save he will also lock his savings. Locking his savings will not make his money easily spend able. The creative investor went to his bank and opened a recurring deposit (RD) account. Each month he directed Rs 4,500 from his salary account to his recurring deposit account.

The lock in period was one year. This plan worked. He realized that it is much easier to let the bank manage the savings. The result was fantastic. His savings was growing. Each month he could log in to his savings account and watch his net worth growing (Rs 4,500 each month). Not only this, he will also get an averaged interest of 4.5% (say) at the end of one year. The investment plans were now showing visual benefits to the creative investor.

Concept of earning form savings form interest
He observed that in three months time he saved Rs13,500 which grew to Rs13,680 after interest money is added to his savings. He earned some interest on his savings. Though the earning was very small (Rs180 only) but the concept of earning an interest from savings made him very excited (another realization of a creating investor). He knew that he has struck the right cord. He made some research with his bank and observed that if he could invest his savings on Fixed Deposit (FD) he will get an interest of 8% per annum. In recurring deposit he was making only 4.5% per annum. But the minimum amount for a bank FD was Rs 5,000 with a lock in period of one year. He was ready to take this gamble. He decided to switch his savings from RD to FD. He noticed an even better returns, his motivation to enhance his investment plans grew further.

He invested Rs 13,500 in FD and made Rs14,540 after one year. He was happy that he is earning good interest in FD as compared to RD.

He knew that he has a savings & investment plans in place. His investments are secured and giving good returns. He and his wife decided to develop a requirement plan. They wanted to know the major financial requirements of their life. They did some brain storming and they came up with a nice plan.

Need for more profitable investment plans
His plan said that their child will need Rs75,000 after 4 years for admission in play school. They will buy his first house after 20 years for which they will need Rs50,00,000. He will retire after 29 years from now.

Before retirement he wanted to have a bank balance of at least Rs1,50,00,000. His plan as a concept was perfect, but problem was the implementation of this plan. His creative investor instincts did not took him long to see that if he is saving Rupees 5,000 a month then he will not able to meet the above goals. Lets say he wants to buy a house-1 at Rs50,00,000 after 20 years. In 20 years he can save only Rs12,00,000 @ Rs5,000/month. From where the balance money will come?

He became more restless. He never knew that their requirements were expensive and with present investment plans in place it was difficult to achieve them in times to come. His wife was also worried; their swift growth suddenly had a massive road block. They decided to do some research work on internet. After one month of extensive study they realized that they need to invest their money in an investment options that will fetch them higher returns like mutual funds and shares.

As he and his wife were very young and they had a minimum of 5 to 7 years time horizon in their hands, investment in equity linked schemes were safe. Contrary to a popular belief that share/stock market are very risky, the creative investor decided to invest in shares. But the problem was that he knew nothing about share market. He gathered courage and time and visited his bank. His bank guided him about all the procedure of online investment in shares. At the end of the day he was very happy and satisfied.

He went on about his studies regarding investment in shares. He used to do through research before putting his money in a particular share (sign of a creative investor). He observed that the average return he can make in share market was about 15.5% per annum. This was what he required. It was just sufficient enough to meet his plan.

A new creative investor must know the power of investment and power of compounding of money. The power of compounding of money is one powerful tool that helps us to fight inflation. Not only it beats the inflation but also makes our money grow. We have already said that “money makes money” but at what rate? A creative investor with a strong investment plans balances his returns and risks. One factor is the rate-of-interest and other factor is time. The rate of growth of money depends on time-period for which the money stays invested. The higher the time-period the faster the money grows. This is the theory of compounding. Some might even say that this theory is most powerful tool of building wealth safely and surely.
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