Before you read other sections of this website you should understand the following basics of investing :-
Inflation
Inflation is the rate at which prices for goods and services are rising and currency’s worth is reducing. In India, inflation is around 7%. So the value of money is depreciating at 7% per year. What costs you around Rs 100 this year will cost your Rs 107 next year. This way Rs 100 today will have the same purchasing power as Rs 200 after 10 years. So the value of money reduces by half in 10 years in India. So if you have a lakh today, if you put it in an avenue where it gets you 7 %, it would become close to 2 lakh after 10 years. This would keep its purchasing power constant. However, at 7% it hasn’t practically grown. IF an avenue gets you 8%( PF gets you that much) then 1 lakh would grow to be about 2.16 lakhs after 10 years. Then after catering to inflation it has grown by a mere 16 k which will be equivalent to 8 k of purchasing power on the date of investment. This is the reason I consider PF a saving rather than an investment.
GDP Growth rate
We often hear India’s GDP growth rate is 7-8% on a average. What does it mean. It means that as a country we are growing at 7-8% after taking out inflation. So actually we are growing at GDP+ inflation( 7+7) i e 14%. 7-8 % is pure growth after inflation. GDP growth is a average of all sectors. While some sectors may be growing less(agriculture), some may be growing more(Industries, service sectors). So we can say as a country we are growing at 14%. For developed countries like USA the inflation will be lesser(3-4%) and even the growth is lesser. This is the reason rupee depreciates compared to dollar.
Financial Independence
Financial independence is a state in which an individual or household has sufficient wealth to live on without having to depend on income from some form of employment. Financially independent people have assets that generate income(cash flow) that is at least equal to their expenses. Income you earn without having to work a job is commonly referred to as “income”. For example, if someone receives Rs 35000 in rent from a property(which has all loan paid) that they own, but their expenses total Rs 30000, they can live on their rent income because it pays for all their expenses to live (with some left over). Age and existing wealth or current salary don’t matter – if someone can generate enough income to meet their needs from sources other than their primary occupation, they have achieved financial independence. They are now free to spend their time doing the thing they enjoy without needing to work a regular job to pay their bills. We all like to pursue things which we are passionate for. But they may not make us a living. So we have to perforce work for a living.
Power of compounding
Simply watch the video below to understand power of compounding and why is it important to start saving early when one starts working. To say it in simple words money starts multiplying faster when the principle becomes big.
Becoming wealthy
There is difference between earning well and becoming wealthy. All those earn well do not become wealthy. There are many books that have been written on this. A few are “Richest Man in Babylon” , “The Millionaire Next Door”, “Rich Dad and Poor Dad”. If you haven’t read any you may see a video of their summary on you tube. Richest Man in Babylon, Rich Dad and Poor Dad are a good read.
Watch the executive summary of “The Millionaire Next Door” from YouTube in below video:
What governs interest rates, share price or price of anything in general
These depend on demand/supply. If demand for loans is more compared to money available with banks/other institutions then the interest rates go up and vice a versa. This principle applies to everything, be it land, company shares or most other things for that matter and decides the price. You cannot independently look at the price change of something when looking to invest- this is speculation than investing. When you look at something to invest you have to see its value rather than just seeing the change in price. If you invest in a company’s stock then it should be because you believe in that company and its business model rather than just looking at appreciation of the share price. I have seen the market cap of some companies to be unrealistic compared to the assets they own. This is only because people continue to buy it seeing the rise in share price without realising the actual value of the company at present. Its not only important to invest in a good avenue but the price at which you invest also matters.
