Understanding Money Management in Trading and How To Save and Invest

Welcome to the world of personal finance, a vital skill that can help you achieve stability and success throughout your life. This chapter will introduce you to some essential financial concepts and explain why managing your money wisely is important.

What is Money Management?

Money management is the process of budgeting, saving, investing, spending, or otherwise overseeing the capital usage of an individual or group. Effective management of your money involves knowing how much you earn and how much you spend and planning how to best allocate your resources to meet your needs and future goals.

Saving vs Investing

When it comes to growing your money, you have two primary options: saving and investing. Though they might seem similar, they serve different purposes in your financial strategy.

• Saving: This is the act of putting money aside in safe places where it faces little risk. Savings are often kept in accounts like savings accounts, fixed deposits, or recurring deposits, where they earn interest over time. The main goal of saving is to preserve money for future use, ensuring that you have an emergency fund or cash for upcoming expenses.
• Investing: Investing takes saving a step further by using your money to buy assets that could increase in value over time. Common investments include stocks, bonds, mutual funds, and real estate. While investing involves higher risks compared to saving, it also offers the potential for greater returns, helping you reach more substantial financial goals like retirement or wealth building.

Understanding these concepts and using them wisely can help you secure your financial future. Let's dive deeper into how you can set effective saving goals, choose the right type of savings account, and begin your investing journey.

1. Identifying Different Savings Goals

Managing your money wisely starts with setting clear, achievable goals. Different goals require different approaches and priorities. Here are some common savings goals you might consider:

• Emergency Fund: An emergency fund is crucial as it acts like a financial safety net designed to cover unexpected expenses such as medical emergencies, sudden home repairs, or unforeseen travel costs. Experts recommend saving enough to cover three to six months of living expenses. This fund should be easily accessible, meaning you should be able to withdraw the money quickly and without any penalties.
• Education: Saving for education is investing in your future. Whether it's for college fees, textbooks, or living costs while studying, having a dedicated savings plan for education can reduce the need for student loans or financial stress later on. Start small and increase your savings as you grow older and possibly take on part-time jobs.
• Retirement: It might seem far off now, but starting to save for retirement early can significantly impact your financial security later in life. Thanks to the power of compound interest, even small amounts saved today can grow into substantial sums by the time you retire. Opening a junior individual retirement account (IRA) or participating in a family business's provident fund are ways to begin.
• Big Purchases: Whether you're dreaming of buying a new bike, or a computer, or planning a major trip, setting aside money for big purchases helps you avoid debt. For such goals, consider setting up a separate savings account or a recurring deposit where you contribute a small amount regularly until you reach your target.

Each of these goals requires planning and discipline, but by identifying what you're saving for, you can tailor your savings strategies to be more effective and purposeful.

2. Calculating the Required Savings Amount

Knowing how much you need to save for various goals is a fundamental skill in personal finance. This section will guide you through setting realistic savings targets and using simple formulas to figure out how much to save regularly—monthly or annually—to meet your financial goals.

Setting Realistic Goals: Begin by clearly defining what you want to save for. Consider how much you can realistically set aside from your allowance, gifts, or part-time job earnings. It’s important to balance your savings goals with your regular spending needs, so make sure your targets are achievable without putting too much strain on your day-to-day finances.

Basic Savings Formula: The formula to calculate your required savings amount is straightforward: 

Monthly Savings = Total Goal Amount divided by Number of Months Until Goal.

This formula helps you determine how much money you need to save each month to reach your goal by a specific time.

Example 1: Saving for a New Phone

Imagine you want to buy a smartphone that costs ₹15,000, and you plan to purchase it in 10 months. Using our formula:

Monthly Savings = 15,000/10 = ₹1,500

You will need to save ₹1,500 each month to buy your phone in 10 months without financial stress.

Example 2: Saving for College

Suppose your goal is to start college with ₹50,000 saved for books and living expenses, and you have 24 months until college starts. Your monthly savings calculation would be:

Monthly Savings = 50,000/24 ≈ ₹2,083

You would need to save approximately ₹2,083 every month.

Adjusting Your Goals: Your ability to save might change over time due to new expenses or income changes. It’s okay to adjust your monthly savings amount as needed. The key is to stay committed and keep saving regularly.

Setting and achieving savings goals boosts financial literacy and instils a discipline that benefits all aspects of life. By following these steps, you can make informed decisions that bring your financial goals within reach.

3. Choosing the Right Savings Accounts

When it comes to saving money, not all accounts are created equal. Different types of savings accounts can help you achieve various goals depending on their features. Here’s how to choose the right one for you:

Types of Savings Accounts

• Regular Savings Accounts: These are the most common type of accounts where you can deposit money, earn interest, and withdraw funds when needed. They’re perfect for everyday savings and emergency funds.
• Fixed Deposits (FDs): In a fixed deposit, money is deposited for a fixed time, usually ranging from a few months to several years, offering higher interest rates compared to regular savings accounts. You cannot withdraw money from FDs before the maturity date without incurring penalties.
• Recurring Deposits (RDs): These accounts allow you to deposit a fixed amount of money every month for a period defined at the outset, which earns interest at rates similar to fixed deposits. RDs are ideal for setting aside a small amount monthly towards a larger goal.

Factors to Consider in Money Management

• Interest Rates: Higher rates mean more earnings on your savings. Compare rates offered by different banks to maximise your returns.
• Risk: Savings accounts are generally safe, especially if they are with reputed banks and below the insured amount by institutions like the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Accessibility: Consider how easily you can access your funds. Regular savings accounts offer great liquidity, whereas fixed deposits do not.
• Penalties: Be aware of any fees or penalties for early withdrawal from fixed or recurring deposits.
• Youth-Oriented Products: Many Indian banks offer accounts specifically designed for young people and students. These products often have features like no minimum balance, lower fees, and online banking options that appeal to tech-savvy youth.

4. Introduction to Investing

Investing can be a powerful way to build your wealth over time. Here’s what you need to know about starting your investing journey:

Basic Types of Investments

• Stocks: Shares of ownership in a company that you can buy or sell. If the company does well, the value of your stocks may increase.
• Bonds: Loans you give to a company or government in exchange for periodic interest payments plus the return of the bond’s face value at maturity.
• Mutual Funds: Investments pooled from many investors to buy a diversified portfolio of stocks and bonds managed by a professional.
• Exchange-Traded Funds (ETFs): Similar to mutual funds but traded on stock exchanges like individual stocks.

• Potential for Growth: Investments can grow in value over time, helping you achieve substantial long-term goals such as buying a house or funding your retirement. The power of compound interest means your investments could generate earnings not only on the initial amount invested but also on any interest, dividends, and capital gains that accumulate.
• Understanding Risk: All investments carry some level of risk. Stocks and mutual funds might offer high returns, but their value can also go down depending on market conditions. Bonds are generally safer but offer lower returns. Your risk tolerance—how much risk you can handle without worrying—should guide what types of investments you choose.
• Risk Tolerance: Everyone has a different comfort level with risk. It's important to understand your own risk tolerance when investing. This will help you build a portfolio that you are comfortable with and that can still achieve your financial goals.

Investing wisely requires understanding these basics and occasionally revisiting your investment choices as your financial situation and the economic environment change.

5. Practical Steps to Start Saving and Investing

Learning how to manage your money through saving and investing is an essential skill that will benefit you throughout your life. Here’s how you can start:

How to Open a Savings Account

• Choose Your Bank: Look for banks that offer favourable interest rates and low fees, especially those with accounts designed for students or young adults.
• Prepare Necessary Documents: You will generally need some identification (like your school ID or Aadhaar card) and possibly a parent or guardian if you are under 18.
• Open Your Account: You can usually start this process online, or you might visit the bank in person. Setting up an account online is becoming more common and is quite convenient.

Starting an Investment Fund

• Learn About Options: Understand the basics of various investment vehicles, such as mutual funds, stocks, bonds, and ETFs.
• Seek Guidance: It can be helpful to talk to a financial advisor, even if just informally, to get advice that suits your long-term financial goals.
• Begin With Small Investments: Many investment funds allow small initial investments, which can be increased as you become more comfortable and your financial situation improves.

Maintaining Financial Discipline

• Regular Savings: Make a habit of saving a portion of all money you receive, whether from gifts, an allowance, or a part-time job.
• Use Tools and Apps: Several apps and tools are available that can help you manage your savings and keep track of your investments. Apps like ET Money, MyUniverse, or Walnut can help you budget, invest, and monitor your financial health.

6. Common Mistakes and How to Avoid Them

Even the most seasoned savers and investors can make mistakes. Being aware of common pitfalls can help you avoid them:

• High Fees: Always check the fees associated with any financial account or investment fund. High fees can eat into your returns over time, significantly reducing your growth.
• Chasing Quick Returns: Investing in options that promise high returns over a short period can be tempting, but they often come with high risks. It’s better to aim for steady, long-term growth.
• Poor Financial Management: Avoid spending impulsively or using credit irresponsibly. Keeping a budget and tracking your expenses can help you maintain control over your finances.

By being aware of these common errors and actively working to avoid them, you can strengthen your financial foundation and build towards a more secure future.

Conclusion

Throughout this chapter, we have explored the fundamental aspects of managing your finances through saving and investing. We've discussed different types of savings goals, from creating an emergency fund to saving for college and big purchases. We've also covered how to calculate the amount you need to save and the importance of choosing the right type of savings account. Additionally, we introduced you to the basics of investing, including the different types of investment options available and the potential risks and returns.

Starting to practice good financial habits early can set the foundation for a secure and prosperous future. By understanding the importance of both saving and investing, you can make informed decisions that will benefit you throughout your life. Remember, the key to financial success is discipline, knowledge, and the willingness to learn and adapt as you grow.

We encourage you to start small, stay consistent, and use the tools and resources available to you to track and manage your savings and investments. By doing so, you can achieve your financial goals and build a strong financial understanding that will serve you well into adulthood.