Letter to a young investor #2 - The money manual

Dear Young Investor,

I hope this letter finds you well and in high spirits.

You remember my uncle whom I had introduced in my previous letter, who taught me that wealth is not about accumulating money but about living a life of purpose, freedom, contentment, and fulfilment?

Well, a few years into his guidance and once I had started earning money, I remember asking him about the ‘operating manual for money’ that did not exist – and still does not – unlike most things in life that come with a manual on how to operate them.

Think about it. When you buy a new gadget, it comes with a booklet explaining how to use it, maintain it, and even troubleshoot it when things go wrong. But when it comes to money, something we use every day and crucial to our lives, there is no manual handed over. You are left to figure it out on your own, often learning through trial and error, sometimes at a great cost.

In this letter, I want to share with you an operating manual for money — most of which are money principles I got from my uncle and some through trial and error through my personal experiences.

Please note that unlike the manuals for gadgets, the money manual is not perfect, and it does not cover every possible situation. But it will give you a foundation, a way to ‘think’ about money that will serve you well over time.

You are free to modify this manual to suit your needs as you ‘experience’ money in your life. It is just that this has worked well for me for the past twenty years, and so I am happy to share it with you. Also, I will be talking about a lot of these principles from the money manual in my future letters. Today, I wish to share them with you, so you have them as a quickly accessible manifesto whenever you need them as a reminder.

So, grab a glass of water, and let’s dive into this “Money Manual” together.

1. Money: It’s a Tool, Not the End Goal: My first letter to you covered this aspect in detail, so I will be brief here. Money is not the endgame of life, but just a tool, a means to an end. The end might be freedom, security, the ability to support your loved ones, or the chance to pursue your passions.

When you start thinking of money as a tool rather than the goal, you can make decisions that are aligned with your true values and desires.

2. The Golden Rule – Spend Less Than You Earn: This might sound obvious, but it is the most fundamental principle of the money manual.

Most people think about saving like this:

Income – Spending = Saving

But flip it around:

Income – Saving = Spending

In other words, first save money and only then spend what is left (of course, after budgeting for necessary expenses like food, housing, and utilities).

In terms of how much you should save, start with saving at least 10% of your monthly income, and gradually increase it to 20%, then 30%, and so on. Your aim should be to save enough without compromising on your quality of life now.

When you consistently spend less than you earn, you create a surplus. That surplus is what you invest. That is what grows over time. And that is what will eventually give you financial freedom.

It does not matter how much you earn, because if you spend it all, you are no better off than someone earning far less.

3. Compound Interest – The 8th Wonder of the World: Well, that is what Albert Einstein reportedly said about compound interest, a concept you may have studied in high school, and the application of which will work wonders in your life going forward.

Compounding is when your money earns money, and that money earns more money. It is the snowball effect, and I will tell you more about it in my future letters. But the most important thing you must remember about compounding is that its magic works best with time. The earlier you start, the more powerful it becomes. Every rupee you save and invest today will be worth far more in the future than the rupee you save a decade from now. Just keep this core mantra in mind and, like I said, I will share more about it in my future letters.

4. Price vs. Value – Know the Difference: Oscar Wilde famously said that “a fool is someone who knows the price of everything and the value of nothing.” I was one such fool early on and learned this money lesson a bit late. But it was one of the most important lessons, nonetheless.

Just because something is expensive does not mean it is valuable, and just because something is cheap does not mean it is worthless. When it comes to how you use your money, understanding this difference is crucial.

Price is what you pay, while value is what you get. When it comes to how you spend and invest, remember to always buy value, whether you are buying things, stocks, or any other investment.

5. Debt – Treat it Like a Trap: Matt Haig wrote in his book Reasons to Stay Alive – “Alcohol math. Wine multiplies itself by itself. The more you have, the more you are likely to have. And if it’s hard to stop at one glass, it will be impossible at three. Addition is multiplication.”

The math of debt (borrowed money) is exactly like that. The more you have, the more you are likely to have. And if it is hard to stop early, it will be impossible later.

Sure, some amount of debt can be useful (like a home loan or a one to start a business), but be very careful. I have hated debt all my life, because I see it as a form of slavery — especially high-interest debt like credit cards. It ties you down, limits your options, and can lead to financial ruin.

Treat this as one of the money important instructions of this money manual.

6. Watch Out for Lifestyle Inflation: Here is what I can visualise when you start earning more money as you progress in your career. You will be tempted to spend more. You will think, “I am making more, I can afford it.”

Up to an extent, spending more to upgrade your lifestyle with rising income is fine. But watch out for the trap of ‘lifestyle inflation,’ a situation when you start spending more money as your income increases. Instead of saving or investing the extra money you earn, you upgrade your lifestyle — like buying a more expensive car, eating out more often, or getting a bigger house.

Over time, this can make it harder to save money or build wealth because your spending keeps going up as your income does. It is like always feeling like you need more, even though you are earning more.

My instruction through this money manual is – instead of increasing your spending every time you get a raise, increase your savings. Future you will thank you.

7. Invest in Yourself: Warren Buffett, one of the world’s greatest investors you should read about, said that “the most important investment you can make is in yourself.”

I have reaped great benefits from following this advice in the last 20 years of my life. The best investment you can make is indeed in yourself — your education, your skills, your health.

Money spent here – books, courses, health classes, etc. – pays dividends in ways you can never measure. The better you are, the more opportunities you will have to earn, save, and invest.

8. Don’t Chase Trends: The world of money and investing is noisy. Every day, there is a new hot stock, a new cryptocurrency, or a new get-rich-quick scheme.

My advice to you – Do not chase trends. Instead, focus on sound, long-term investments. The slow and steady tortoise really does win the race in the world of investing.

9. Keep It Simple: Complexity is the enemy of success when it comes to money and investing. The more complicated something is, the more things can go wrong. So, stick to simple, proven strategies. Buy quality investments, diversify, and hold for the long term. I will write to you about all these things in my future letters but treat these as thumb rules for now.

10. Money Can’t Buy Happiness, But It Can Buy Freedom: Money will not make you happy. But it can buy you freedom — the freedom to live life on your terms, to pursue your passions, to spend time with those you love. And that is priceless.

Remember, there is no one ‘right’ way to handle money. These principles are a good starting point, but feel free to adjust as you go along. The goal is not to be the wealthiest person when you die but to have enough to live the life you want.

Just as the great sculptor and painter Michelangelo saw the statue within the marble, I wish you see the potential in your current and future financial situation. Remember that your wealth is not just what you have now but what you can ‘sculpt’ it into over time.

This mindset shift is crucial because it transforms your approach from passive to active. Instead of waiting for financial success to happen to you, you become the artist of your financial future.

So, the first thing you must do is start by visualizing your ideal financial situation in detail. What does it look like? How does it feel? Then, like Michelangelo with his chisel, use the financial tools and ideas I am going to share with you in this series of letters to gradually shape your reality to match that vision.

Also, remember that masterpieces are not created overnight. Michelangelo spent four years on the Sistine Chapel ceiling in Vatican City. Your financial masterpiece may take decades, but each small action shall take you closer to your financial freedom.

So, take your time, be patient, and let your money work for you. After all, with the proper operating manual, you can turn money into the tool it was always meant to be – a tool for living a good life.

Wishing you success on your journey.

Warm regards,

Vishal.

This article is authored by Vishal Khandelwal of safalniveshak.com, an initiative to teach investors how to make simple and wise investment decisions.