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The article defines basic money terms like Money, Inflation, Magic of Compounding, Saving, Investment, Asset, Liability, Equity, SIP, Taxes and Financial Risk. There is a summary of action that a school kid can take to better understand money.
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Naman is in the sixth standard and is very good in studies. He is always a topper and his parents have taken extra care for his all-round personality development. Other day, Naman heard his parents speak to their Financial Planner. They were talking about Financial Goals, SIP, Inflation and Taxes. Naman is very confused. Should he worry about all these terms?
While you enjoy your school days, there are few things knowing about money will certainly help you go a long way. First let’s look at few terms that you must understand:
Money: When you have money, you can buy things you need and live a comfortable life. As a basic necessities, you need food, shelter and clothing. You need money to buy these. If you love Cadbury, you will need money to buy it, as an example. So money gives you the power, the flexibility to buy the things that you need or like.
Inflation: This reduces the power of money. As an example, you would have noticed that your school fees go up every year. Part of the reason is inflation. Because of inflation, with same amount of money, you are able to buy lesser things. With Rs. 100 if you bought 5 Cadbury @ Rs. 20 Each, last year, you may now be able to buy only 4 Cadbury as the price has gone up to Rs. 25. This is inflation. In your financial life, remember that Inflation is your No. 1 enemy.
While you enjoy your school days, there are few things knowing about money will certainly help you go a long way. First let’s look at few terms that you must understand:
Money: When you have money, you can buy things you need and live a comfortable life. As a basic necessities, you need food, shelter and clothing. You need money to buy these. If you love Cadbury, you will need money to buy it, as an example. So money gives you the power, the flexibility to buy the things that you need or like.
Inflation: This reduces the power of money. As an example, you would have noticed that your school fees go up every year. Part of the reason is inflation. Because of inflation, with same amount of money, you are able to buy lesser things. With Rs. 100 if you bought 5 Cadbury @ Rs. 20 Each, last year, you may now be able to buy only 4 Cadbury as the price has gone up to Rs. 25. This is inflation. In your financial life, remember that Inflation is your No. 1 enemy.
Magic of Compounding: While inflation reduces the power of money, the Magic of Compounding helps to increase your money. You must have studied compounding interest i.e. interest on interest. With Magic of Compounding, when you start saving early, the money you save, saves more money for you. This helps you to grow your money very fast. This is like a super-fast express train running between say Mumbai and Delhi. So like Inflation is your No. 1 enemy, Magic of Compounding is your No. 1 friend. Don’t forget him.
Saving: This is what is left after you spend. So if your pocket money is Rs. 1,000 p.m. and if you spend Rs. 800 in that month, then you have saved Rs. 200. Your money grows only when you spend less than your income. Since you do not earn right now, your income is pocket money. We consider 30% saving as a good ratio. So from your pocket money of Rs. 1,000 p.m., you must save Rs. 300 p.m.
Investment: Now that you have saved money, you must invest that saving in such a way that your saved money grows. A goal based investment is one of the best way to invest. A goal is your target. As an example, you may want to take up a 2 year post graduate MS study in Boston in US in the year 2020. So you will need money for this education. Your parents can help you by taking a loan. But wouldn’t it be nice if the money you saved and invested is used to pay for your education?
Asset: Asset means something that you own that has a value. If you have a Financial Assets, then it has a financial value. Your money can be in the form of assets like Cash, Bank Balance, Fixed Deposits, Jewellery, Equity Stocks, Mutual Funds, Real Estate and Paintings. So these are various asset classes. Each one has their own pluses and minuses. For now, you should know that your money should be distributed across different asset classes. This means that you should not have a large part of money in a single asset class say Real Estate or Gold. This is to avoid the risk of a single asset class not performing well.
Liability: Liability means something that you owe to someone. So your parents may have taken a home loan. This is a liability. When you go for your post-graduation studies, your parents may have to take an education loan. This is a liability. So Financial Liability is created when we borrow money from someone and pay them interest on such a liability.
Equity: This is an asset class. You can invest your money in Equity for long term investments. This should be at least for a period of 5 years. There are many ways you can invest in Equity. Two most popular ways are to invest through Equity Mutual Funds (MFs) or directly buy the Equity Stocks from the Stock Exchange. Since dealing directly in Equity Stocks requires expertise, we strongly suggest that you invest in Equity through MFs only.
SIP: This means Systematic Investment Plan (SIP). SIP allows you to invest regularly. This works on a average cost principle. Let’s say that you are buying Equity MFs on a monthly basis, say Rs. 500 every month through SIP. Now when the markets are high, the Equity MF unit price will be high. So you will buy fewer units. When the markets are low, the Equity MF unit price will below. So you will buy more units. So SIP allows you to average out your cost price. This is known to be one of the best way to invest.
Taxes: Once you grow up, you will start earning money. From this income, you will have to pay tax to the government. Tax is the fee charged by the government to provide you facilities as the citizen. Government provides you security, infrastructure and does socio-economic development. So they need money to manage their budget. Hence they levy taxes on you.
Financial Risk: Risk means something may or may not happen. If a Financial Risk happens you may end up losing money. As an example, if you are sick and hospitalized then your parents will have to pay the hospital’s bill. So this is a Financial Risk for your family. However, if your parents have taken a health insurance (Mediclaim) for you, then the Insurance company will pay the bill.
Now that you have understood the basic concepts, let’s see what actions you can take to understand and better manage your money. It is important that you assign a target date for closure of each and every action.
Saving: This is what is left after you spend. So if your pocket money is Rs. 1,000 p.m. and if you spend Rs. 800 in that month, then you have saved Rs. 200. Your money grows only when you spend less than your income. Since you do not earn right now, your income is pocket money. We consider 30% saving as a good ratio. So from your pocket money of Rs. 1,000 p.m., you must save Rs. 300 p.m.
Investment: Now that you have saved money, you must invest that saving in such a way that your saved money grows. A goal based investment is one of the best way to invest. A goal is your target. As an example, you may want to take up a 2 year post graduate MS study in Boston in US in the year 2020. So you will need money for this education. Your parents can help you by taking a loan. But wouldn’t it be nice if the money you saved and invested is used to pay for your education?
Asset: Asset means something that you own that has a value. If you have a Financial Assets, then it has a financial value. Your money can be in the form of assets like Cash, Bank Balance, Fixed Deposits, Jewellery, Equity Stocks, Mutual Funds, Real Estate and Paintings. So these are various asset classes. Each one has their own pluses and minuses. For now, you should know that your money should be distributed across different asset classes. This means that you should not have a large part of money in a single asset class say Real Estate or Gold. This is to avoid the risk of a single asset class not performing well.
Liability: Liability means something that you owe to someone. So your parents may have taken a home loan. This is a liability. When you go for your post-graduation studies, your parents may have to take an education loan. This is a liability. So Financial Liability is created when we borrow money from someone and pay them interest on such a liability.
Equity: This is an asset class. You can invest your money in Equity for long term investments. This should be at least for a period of 5 years. There are many ways you can invest in Equity. Two most popular ways are to invest through Equity Mutual Funds (MFs) or directly buy the Equity Stocks from the Stock Exchange. Since dealing directly in Equity Stocks requires expertise, we strongly suggest that you invest in Equity through MFs only.
SIP: This means Systematic Investment Plan (SIP). SIP allows you to invest regularly. This works on a average cost principle. Let’s say that you are buying Equity MFs on a monthly basis, say Rs. 500 every month through SIP. Now when the markets are high, the Equity MF unit price will be high. So you will buy fewer units. When the markets are low, the Equity MF unit price will below. So you will buy more units. So SIP allows you to average out your cost price. This is known to be one of the best way to invest.
Taxes: Once you grow up, you will start earning money. From this income, you will have to pay tax to the government. Tax is the fee charged by the government to provide you facilities as the citizen. Government provides you security, infrastructure and does socio-economic development. So they need money to manage their budget. Hence they levy taxes on you.
Financial Risk: Risk means something may or may not happen. If a Financial Risk happens you may end up losing money. As an example, if you are sick and hospitalized then your parents will have to pay the hospital’s bill. So this is a Financial Risk for your family. However, if your parents have taken a health insurance (Mediclaim) for you, then the Insurance company will pay the bill.
Now that you have understood the basic concepts, let’s see what actions you can take to understand and better manage your money. It is important that you assign a target date for closure of each and every action.
To summarize, Money is the power you need to live life comfortably. Inflation is your enemy and reduces the power of your money. You have to make friends with power of compounding and run faster than inflation and grow your money. To accumulate money, you must first spend less than your income (pocket money). Try and save around 30% at least. What you save, you must invest so that your money grows. For long term investments, you can look at SIPs in Equity MFs. You must make an action plan with target dates.
This article has been published in the April issue of ‘The Teenager Today’.
This article has been published in the April issue of ‘The Teenager Today’.
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