Lessons In Personal Finance 2020
I learnt a few key lessons in personal finance in 2020. I didn’t actively seek to become better in personal finance. Luck and happenstance pushed me to know more and take some action on this front.
Here are my key lessons:
- Power of Compounding
Enough has been written in the FinTwitter and other finance blogs about this. But trust me, this is truly the most important lesson I have learnt. Money like many things in life compounds at a different level. There is no right rule on when to cash out. It depends a lot on your life situation, but if you do the basics right, be patient and give time to do its job of compounding, you can see phenomenal results.
(…to be continued with lessons from inflation, insurance and investing)
- Understand Inflation
If I say that every ten years or so, I take half of your money from the bank account and burn it, will you be happy? But that is exactly what inflation does to our money saved in a fixed deposit for a long period of time. (Of course, the bank will try to give paltry interest rates to match the inflation rates.)
There is a reason why the crypto movement is taking place and has strong views on fiat currency and central banks.
But as a normie, I need to understand that inflation is around 7% to 8% and we have absolutely no control over it. Governments and central banks may decide to print more money for various reasons. But we are part of the system and hard-earned money goes through the problem of devaluation because of this.
Whatever decisions we make with our money, let’s keep this basic lesson about inflation in mind. All the asset allocation or diversification strategy has to take this into consideration. This is not to say that you cannot have money in fixed deposits in banks. You will need to have some money which can be easily taken out for the emergency reason. But if the bank deposit is your main personal finance or wealth creation strategy, then it is a huge problem.
(… to be continued)