Basics of money and investment [ Earn while you sleep ]

Learning about money, saving and investment is essential. True freedom can only be achieved via financial freedom. And the internet is filled with get rich quick schemes which are nothing but scams so I decided to write few things that I know about saving and investment. 

Why do you need to invest?

So let's start with the first thing called inflation. Suppose you want to buy a piece of land in your village and it currently costs Rs 10,00,000 and you have Rs 7,00,000 in your savings. You start saving money and you estimate you can save Rs 3,00,000 in 2 years from your salary. Do you think you can buy the same land in Rs 10,00,000? Its highly unlikely, in 2 years the price of land would have become more than Rs 10,00,000 to like Rs 11,00,000 or Rs 12,00,000 or even more. You would naturally think that the valuation of the land has increased over time but the actual truth is valuation of your money has decreased as well.

Inflation a complex term which involves everything from import and export to government printing more money each year. But on a simplified level, the actual value of currency depreciates each year. For eg the inflation rate of Nepal in last year was around 5% according to Nepal Rastra Bank. This means for eg. if the price of a piece of cloth was Rs 100 last year than it would be around Rs 105 this year. And in day to day life you must have noticed, things that cost Rs 150 last year, costs like Rs 175 this year. 

What is 'earn while you sleep'?

If you saved Rs 10,00,000 in your cupboard then it would keep depreciating its value over time due to inflation as explained earlier. Even if you saved the money in your savings account that has less than 5% interest per year, it would still be losing its value as the inflation is more than 5% these days. 

Therefore, as an intelligent person it's your duty to let it grow by investing. That investment becomes your secondary earning. There is a popular saying that you can never achieve true financial freedom unless you earn even while you sleep. To simplify this, you invested above Rs 10,00,000 by buying a house in your village. As you don't need the house, you rent out the house to someone and they would pay you like Rs 15000 each month as rent. So you earn Rs 15000 each month from the house and also the valuation of the land keeps increasing. Even if you decide to sell the house after 5 years, it would sell for at at least 15,00,000. That is called earning while you sleep. 

How much amount do you need to earn while you sleep?

It's not necessary that you need to have huge amount of investments to have secondary earning. For eg. I have multiple blogs and earning from these blogs are my secondary earnings. I spend few hours a month but get decent income from blogs. There always has been some innovative ways of earning secondary income. Let me share you with the example of my cousin. 

He was studying in a college in Kathmandu but the lockdown forced him to go to village. Unfortunately, he needed internet connection to attend his online classes but unfortunately our village did not have cable internet at the moment and the broadband connection was so expensive. He did something different. He started giving WiFi connection to another people at the price of Rs 250 per device. At first people thought, it was expensive but it was lockdown and most of the person had come from city. Rs 250 per month for unlimited connection was cheaper than the mobile network tarrif. The user suddenly started growing, now almost every family has taken the subscription of his WiFi service. There are more than 500 devices. Obviously, he needed to scale his modem and routers but it was like one time investment and he earns more than Rs 1,00,000 per month after deducting internet and electricity costs. The village has got the fiber net now but people still prefer his service as fiber net cost around 1500+ per month. The best part the entire service runs on its own, he has recently completed his study and doing internship in some company in Kathmandu, Nepal.

What is 50-30-20 rule?

Your job can only fulfill your needs. You need some form of secondary earning to achieve your true financial freedom. Now moving on how do you save your money. We have expenditures like rent, food, internet subscription, mobile tariffs. These are your needs. Then you have wants like buying the brand new iPhone 13 or going to trip with your friend to Everest Base Camp. This is your want. If you read financial books, they will always give you a ratio of 50:30:20. 

50% of what you earn goes into your expenditure. 30% you should save in your bank for your want. Like you want to buy a MacBook Air for work or even a car for transport[if your 30% can accumulate that much ;)]. And the remaining 20% should be saved strictly. This should be in the form of saving that you wont use at all for at least 10 years. You can Fixed Deposit it or even invest in good stocks.

Is Fixed Deposit worth it?

You can keep your money in fixed deposit where you can earn pretty good amount of money. For eg if invest Rs 1,00,000 in Fixed Deposit today at the current interest rate of 10% of most of the banks . You'd be surprised to know it would become Rs 2,68,506 in 10 years meaning it would be more than double of your investment amount. Thats the power of compounding. You can calculate yourselves here FD Calculator - Calculate Fixed Deposit Interest Rates Online 2022 (groww.in)

There are also recurring fixed deposit accounts where you can invest a certain amount per month. Its even more interesting. Suppose you earn 25000 per month and by 50/30/20 rule, you would like to invest 5000 every month and then forget about it, meaning you don't withdraw it in less than 10 years. You'd be again surprised to know that it would accumulate to more than Rs 10 lakhs in 10 years. Its like that your money will grow in its own. That's the power of compounding.

I have been hearing a lot about stocks these days? Are they safe?

Stocks are recently most romanticized form of an investment. Your expectation should be average for stocks. You should not have the expectation that you will double the money in 2 months after investing in stocks. It never works like that. Yeah, its possible that one of your company grew 3 times in 6 months but then some investments would lose money as well. So there is a rule of thumb on how much to invest on value stocks. We would discuss about that on some other article. You should then be careful in selecting stocks though. You should never buy a stock just because of social media or tips. 

For eg. if you invest Rs 15000 in stock every month no matter the index is going up or low for like 15 years and you even get like minimum return of 15%, it adds up to Rs 1 crore. And trust me getting 15% returns is not a big thing provided you have invested in good companies from various sectors. Click here to calculate your returns. 

But the big thing while investing in stocks is you need to remain invested even during market crashes and invest even more during crashes. In short term, the market might fall or grow but overall the market expands as the economy of the country grows. If you invest in 10 good companies, 2-3 might completely crash, 5-6 will give average returns but the remaining 2-3 companies would give such good returns that your entire returns will be higher overall. For eg, if you had invested Rs. 15 Lakh in the NLIC scrip in March of 2012, the amount would have grown into Rs. 6 Crore 30 Lakh approximately by 30th of June of 2016 before taxes. All you had to do was stay invested in the company for four years without selling a single share. Click here to read more about this. Also, the more you hold, the less capital gain tax you've to pay so usually holding your stocks for long terms is always beneficial. 

Scrip Initial Value (Rs.) on Asadh 31, 2069 Today's Value (Rs.) CAGR (%)
FMDBL 100,000.00 2,161,680.31 84.91%
SICL 100,000.00 1,835,367.91 78.96%
CBBL 100,000.00 1,695,398.88 76.14%
MNBBL 100,000.00 1,556,553.28 73.15%
OHL 100,000.00 1,130,287.59 62.42%
NLIC 100,000.00 867,483.08 54.05%
SHL 100,000.00 364,240.20 29.50%
ICFC 100,000.00 342,284.80 27.90%
SIGS1 100,000.00 342,200.00 27.90%
NIB 100,000.00 322,376.11 26.38%
EBL 100,000.00 271,437.43 22.11%
NABIL 100,000.00 249,300.96 20.05%
SCB 100,000.00 200,716.76 14.95%
NTC 100,000.00 189,463.22 13.63%
CHCL 100,000.00 188,248.46 13.49%
TOTAL 1,500,000.00 11,717,038.99 50.85%

Caution: I would strongly advise you against trading. Trading means you buy a stock at low price today and within few days when the price of the stock increases, you sell it making a profit. Unfortunately, you can never predict what is going to be the highest or lowest price of the stock in the given time. Also you need to spend ample amount of time to buy/sell the stock at the best time to gain maximum profit. And then there are corrections, what if you invested all your money for trading and the stock goes 20% down. You would be out of your saving for a long duration of time till the stock recovers. Sometimes it can be years. Trading is only for someone who is actively involved in stock market. So, stocks are best for long terms. No matter how worse the crash is if you stay invested, chances are you would eventually end up making profit. Read this if you are still not convinced. Why 99% of traders lose money?

What's the one thing you should avoid doing?

 All of us have wishes for things to buy. Once we start earning we start spending recklessly to fulfil them. Sometimes, we even take debt to buy things or for some similar expenditure like going out or partying. 

If you read best selling financial books or listen to top experts they have contrarian view on this. You should avoid debts as far as possible. At times its kind of important to take loans like education loan and home loans for things that are actually necessary. But apart from that we should avoid in falling debt trap as much as possible. For eg you want to buy a good phone and you already have phone its always good to save the money and buy the phone instead of buying it in EMI. Although paying EMI feels way low than the principal amount but you are always under debt and you would be paying huge interest. Worse thing is, if your earning reduces or stops for some reason, those debts starts to pile up and becomes financial frustration for you.

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