Analysis, the key to investing money

Several factors need to be kept in mind when you are aiming to generate wealth – not just for yourself, but for your subsequent generations as well. Identifying multiple sources of income, understanding your financial expenditure, and having a healthy mind and a strong drive.

 

Given all that, when the time comes to actually investing, you are inundated with an explosion of information. You need to know how to cherry-pick from this flow and also sharpen your intelligence so as to take better financial decisions.

 

Identify trends

Consider this: Someone's expense is your income and your expense is someone's income. Now the lesser your expenses the more are your profits. The same applies to companies.

 

If interest rates go down, your expenses reduce. You can now take more loans and pay more interest. The companies that lend you money have a field day lending more and profiting more, since many others think like you and take loans to buy cars, houses and durables.

 

Doesn't it now make sense to buy their shares at this point?

 

The trick is to see where you spend or would like to spend your money. See what people around you are buying, see where they money is flowing. You don't need to see the balance sheet of each company, just be attuned to what's happening around you. Tie news with its impact.

 

For example, if the rupee has appreciated, companies that are into import will be able to buy more for the same amount of rupees. They can also buy the same amount of goods for a lower price – profits are bound to be made.

 

Or consider a takeover – only a profitable company will have the money to buy another company, in most cases. Total assets increase; expenses go down as synergies are created.

 

Deploy resources

To take better decisions, you first need to know how much money is available to you. Creating budgets and financial controls can both increase this amount and inform you how much you have to create your castle with.

 

You also need to make sure your money is being ploughed into fruitful assets. Paying huge premiums for unneeded life insurance or being over insured are examples of ineffective use of resources. So is investing in PPF at a stage when you are looking to build wealth.

 

Make sure that what you pay for is worth your money. Of course, financial control does not mean cutting necessary expenditure – it is about effective deployment of your resources.

 

Think positive

Though you may not realise this, your mindset and emotions play a strong role in determining the wealth you will make. You especially need to eliminate fear and arrogance, since these cloud rational thinking, affecting your ability to take intelligent decisions.

 

Do not think, "I am born in a middle class household, I cant possibly get that Audi." By doing that, you are pretty much condemning yourself to eternal poverty. Instead, think, "I want to get that Audi. How do I go about it?"

 

On the other hand, thinking in terms of "I know" or "I don't need to know more" or "I am right, you/ that is wrong" is a sure-fire way of shutting doors on all knowledge.

 

Find out, investigate, talk and then take a more informed decision. Be curious always – to find out more, to learn new things. Getting rid of your arrogance will put you on the right track to making advantageous decisions.