Reason 1: Misusing “Compounding”
First mistake you do is by Investing. You are in fact misled from this term. “Power of Compounding”… If you are a student, a fresher, or are in early stages of your career, then you should not do long term investing now. Everyone has taught you the same lesson: if you want to do compounding, then you should invest for a longer period; if you want to stay invested for a longer period, then start the investment today itself—even if you have to start with a small amount.
Small SIP Example
So, let’s see. What is this small amount for you? Let’s say you are able to save Rs. 1,000 only. If we assume 12% return, then as per the rigorous work of 2 years, you will be investing Rs. 24,000 and you will earn Rs. 1,550. But 2 years is not long term; then if you continue it for 30 years, then you will earn Rs. 35 L. I have not even considered inflation yet. It could be possible that 35L value could remain as 5L–7L, after 30 years. Of course, you will start from Rs 1,000; you will invest Rs. 10,000–Rs 50,000 in the future. I hope so.
Focus On Income First
So come back. Based on 2 years of investment, wherein you applied Rs 24,000, you are earning Rs 1,500. So if you are saving Rs 1,000, Rs 2,000 or Rs. 5,000, then your goal is not long term investment. Your goal should be: how should you increase your income? And now your savings which you are only able to save Rs. 5,000—take it upto Rs 10,000–Rs 15,000. Probably, your time right now, i.e. your 20s—this is your best time to grow. Because you have fewer responsibilities, there is no pressure of marriage; at the hormonal level, you are super active and energetic. Before entering 30s, you can increase your monthly income a lot.
Three Smart Early Investments
- Invest in Learning: There is extreme shortage of people to do certain jobs; it takes months to hire a designer or a video editor. If you can save Rs 1,000 a month, enroll in a course and increase your skill; use AI and 10x your productivity.
- Switch Jobs: Switch when you have learnt everything at your job or when increments are low; switching often gives 20%–30% hikes versus 5%–7%. Example of two friends: one stuck with few switches at ~18L, the other switched four times in 8 years and is near 1 Cr.
- Invest in Experiences: If you didn’t buy a course and went on a Himachal trip, you’ll make memories, feel freedom, and get ideas; many startup ideas come from noticing real problems while traveling.
Compounding vs Amount
Think of the Rs 1,000 SIP you’re doing now. Even if you put in 10 years in SIP, you create Rs 1.5 L. But if you increase income first and in the 11th year do a Rs 30,000 SIP, it takes only 5 months to create Rs 1.5 L. More important than investment time is investment amount; you can’t plan retirement at Rs 2,000–Rs 5,000 per month.
Reason 2: Penny Wise, Pound Foolish
Presume you have hustled and your monthly income is good; what will you do with extra money? A real story: a guy earning Rs 16 L annually, Rs 8 L car loan, Rs 50,000 monthly on parties/cigarettes, etc., but only Rs 5,000 SIP. Continuing Rs 5,000 for 5 years gives ~Rs 4 L; but he could do Rs 50,000 SIP and get ~Rs 40 L in 5 years. Budgeting is done by companies and governments, but homes ignore it.
Find Your Leakages
- How much did you spend on Zomato/Swiggy last year?
- How much on subscriptions, especially auto-pay you forgot?
- Random spends on liquor and cigarettes—sum them monthly. Daily Rs 5–10 becomes huge yearly; set a cap like Rs 10,000/month on food delivery (~Rs 333/day) and stick to it.
Reason 3: Misreading Financial Freedom
Financial freedom is when you can say: by ruining my peace and happiness, I won’t only work for money. Maybe you have rental income or enough cash invested in FDs to run the household; don’t confuse this with retirement—freedom can be achieved anytime. The middle-class mindset only sees working for raises, even when the job isn’t loved, which blocks building a second income.
Build a Runway
Will you stay jobless for 6 months? If no, then you admit you can’t survive 6 months without income. A rich mindset says: I don’t like this job, so I’ll save a runway for months or 1–2 years, quit, build a side income or business, and if it fails, I’ll rejoin a job. Many wish for side income but never create the runway to try.
Reason 4: You Need an Emergency Fund
In recent years, lakhs have been fired; if it takes 5 months to get the next job, how will you manage? You need an emergency fund sized to city, expenses, job risk, freelancing vs salaried, family size, responsibilities. Keep it liquid and accessible—not in shares or MFs that might be down when needed; too big a fund also hurts because that money could earn elsewhere.
How To Park It
Ideal place for emergency fund: a flexible bank Fixed Deposit you can withdraw digitally any time; banks carry an RBI insurance guarantee up to Rs 5L per depositor per bank. FD rates are currently high compared to savings accounts.
Reason 5: Don’t Be Over‑Conservative
Risk capacity is inversely proportional to age. At a young age, losing Rs 50–60K isn’t catastrophic; later, it hurts more. Exponential wealth usually comes from taking calculated risks. Allocate 5%–10% of income to high‑risk opportunities you understand (e.g., small caps, specific niches), without disturbing the long‑term portfolio.
Reason 6: The Social-Pressure Spiral
Car, house, wedding, kids, retirement—done in the wrong order and under social pressure, this becomes a debt trap. Wealthy people prioritize buying income‑generating assets first, then lifestyle. Use rules of thumb to keep yourself safe with big purchases and loans.
House Purchase Rules (3/20/30/40)
- 3: Total home cost (including all fees) ≤ 3× annual income.
- 20: Loan tenure ≤ 20 years to avoid excessive interest.
- 30: All EMIs combined ≤ 30% of monthly income.
- 40: Down payment ≈ 40% of home price.
Car Purchase Rules (20/10/4)
- If cash purchase: spend ≤ 50% of annual income on the car.
- If on loan: 20% down payment, EMIs + fuel ≤ 10% of monthly income, and tenure ≤ 4 years.
Avoid Consumer Loans
“No‑cost EMI” nudges overspending by making many buy more than planned; skip consumer loans to protect discipline. Loans are built to increase your spending, not wealth.
Financial Literacy Is Non‑Negotiable
Rich people don’t say “finance isn’t my field.” They learn what’s needed to protect and grow money—whether stocks, real estate, or business. Free resources exist in every language, but you have to study consistently; without literacy, even a crore can be lost to scams and mis-selling.
