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  • Writer's pictureAnkur Kapur

An effective way to think about Investing

Investing can be a daunting journey, especially if you're just starting.

Lately, many influencers on social media have been promoting specific investments like cryptocurrencies and individual stocks such as Microsoft. While these videos can be engaging, it's crucial to remember that direct investment advice online can be misleading or incomplete.

Managing your money better is a crucial step toward achieving financial stability and long-term goals. By following a structured approach, you can ensure that your finances are in order and work towards a secure future. Here are some essential steps to help you manage your money more effectively:

Understanding your financial standing is an essential step in managing your money effectively. Your net worth, which is simply the difference between your total assets and total liabilities, serves as a snapshot of your financial health. Assets include everything of value that you own, such as your home, car, investments, and savings accounts. Liabilities, on the other hand, are your financial obligations, including home loans, credit card debt, student loans, and other forms of personal debt.

Calculating your net worth is straightforward. Begin by listing all your assets and their current market values. Next, list all your liabilities and their outstanding balances. Subtract the total liabilities from the total assets, and the result is your net worth. A positive net worth indicates that you own more than you owe, which is a good sign of financial health. Conversely, a negative net worth suggests that your liabilities exceed your assets, signalling a need for financial restructuring.

Keeping track of your net worth over time allows you to monitor your financial progress and make informed decisions. Regularly updating your net worth helps you identify areas where you can improve, such as paying down debt or increasing savings. By understanding where you stand financially, you can set realistic goals and develop strategies to enhance your financial well-being, ensuring that you manage your money, better.

Next is understanding your cash flows. Cash inflow and cash outflow are the two pillars of this financial balancing act. Cash inflow refers to the money that comes into your account from various sources, such as salary, interest, rent etc. On the flip side, cash outflow encompasses all the money that leaves your account, covering expenses like bills, supplies, and other operational costs.

Properly managing cash inflow and outflow ensures you maintain a steady financial footing. Start by tracking all sources of income meticulously. It’s about monitoring salary, interest, and any other incoming funds. Simultaneously, keeping a detailed record of your expenditures is equally important. This includes everything from daily operational costs to unexpected expenses that might arise.

By strategically planning your expenditures and identifying opportunities to increase your inflow, you achieve a balanced and healthy financial state. 

Next is to understand your financial objectives. Whether you’re saving for a new home, planning for retirement, or funding your child's education, you need to prioritise your investment allocation.

Life is unpredictable, and your financial plan should be able to adjust to changes in your circumstances. Whether it's a career change, health issue, or market fluctuation, you must continuously monitor your plan and make necessary adjustments to keep you on track. 

Break down your goals as needs, wants and aspirations.

Needs: These are the essentials—expenses that you must cover to maintain your basic standard of living. Think of needs as your daily survival kit: housing, utilities, groceries, healthcare, and transportation. 

Wants: These are the extras—items or experiences that enhance your quality of life but are not essential for your day-to-day survival. This could include dining out, entertainment, hobbies, and the latest gadgets. By identifying and budgeting for your wants, you enjoy life without jeopardizing your financial stability. 

Aspirations: These are your long-term goals and dreams—achievements that require careful planning and sustained effort. Aspirations might include buying a home, starting a business, saving for retirement, or travelling the world. You set realistic timelines and create strategic plans to turn these dreams into reality. 

Once all the goal mapping is done, you optimise the mix of various asset classes—such as stocks, bonds, and real estate—to achieve your financial goals while managing risk. This involves not just selecting the right types of investments, but also balancing them in a way that aligns with your time horizon, risk tolerance, and investment objectives.

By following these steps, you can take control of your finances, reduce stress, and build a more secure and prosperous future. Remember, managing your money better is not just about cutting costs but making informed decisions that align with your financial goals.

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