Parking excess Internship Money & the Case for Disciplined Investing

The second years have recently come across quite a sizable amount of funds, from their recent stints as corporate interns. These funds would normally be kept liquid for spending in trips, parties and "other" activities. However, COVID-19 has made these activities nearly impossible. This article here is to build a case for disciplined investing of this extra internship money.

First, a disclaimer to protect me from future visits to courts and/or jails. I am NOT a SEBI registered investment adviser, please visit a registered financial planner if you are reading this to get personal finance tips. This and forthcoming articles are for a general educational purpose written by a finance and investment enthusiast.

Moving on to the first part of the title, parking excess internship money. I have deliberately used the qualifier of 'excess'. The summer internship entailed a lot of hard work for many, and naturally, people rewarded themselves, but this means some money is leftover. So, the following advice should only be applied to such excess money, i.e., the money a person has kept aside with no intentions to meet any expenses out of for at least a year.

A crucial distinction to be made. Suppose my excess money amounts to INR 25,000. This is what is known as nominal income. You could buy all sorts of goods and services for this amount. The unit I use here to describe the amount is INR, but it could be anything else, USD, gold, potatoes, bitcoin, etc. Similar to how we can measure the same distance in centimetres or miles. Now let's say there's a freak who consumes only potatoes. It would make sense for them to measure this amount in terms of potatoes. It could be worth say, 1000 kg of potatoes. If the price of potatoes falls or rises, they would feel richer or poorer (and not when their nominal income goes up or down). The same is true for us semi-freaks. Prices of general goods and services determine our richness/poorness. INR 25,000 might mean nothing in a world where the price of bread is doubling every day (actual situations in Germany, Zimbabwe, Venezuela).

Hence the concept of real income. If prices of general goods and services move from say 100 to 120 (up 20%), and our nominal income grows from 25,000 to 27,500 INR (up 10%), we can calculate that our real income degrows from 250 to 229.17 (down 8.33%). The lesson is that even if our nominal incomes grow, our real incomes can decrease. This will happen if the prices of general goods and services rise faster than the rise in our nominal incomes.

This general price rise is known as inflation. So, we come to a simple goal of all investors and even ordinary rational people like you and me- beating inflation. Inflation in this sense is like a tax. Though we don't see our nominal incomes going down in our cosy bank accounts, inflation is eating our real income up like an invisible tax. You and I can consume only less and less on the same nominal amount because the prices of potatoes, oil, textbooks, etc. keep going up and up.

Most people I know keep their excess money safe and sound in bank accounts. Why I ask them. The money is safe, the money gets me interest, I can withdraw whenever I like, they tell me. All the reasons are valid but since we now know about real vs nominal income, let's see if it still makes sense.

Average savings account interest rate in India: ~3.5% [1]

Average inflation in India: ~5% [2]

The economic situation of the country is such that millions of depositors and even ‘intelligent’ MBAs like you and I are losing out to inflation. Negative real returns are eroding our savings, decreasing our real incomes and internship monies.

The way out is simple enough, move this excess money out of savings accounts in the bank and into liquid funds, because:

Average liquid fund returns: ~6% [3]

For now, it's not really necessary to go into how these funds operate and what is the source of these returns. Liquid funds are safe, liquid (means you can deposit and withdraw quickly without charge) and convenient. With made-in-India fintech to our rescue, numerous platforms such as Kuvera, Paytm Money, Groww, Zerodha Coin, etc. are available which make investing in liquid funds hassle and commission-free.

With this established, I can move on to the second part of the title- the case for disciplined investing. To quote one of the most successful investors of all time,

"There are only two ways to get rich, either own a successful business or own others' successful businesses." - Warren Buffett

The case for disciplined investing is simple since it aims for just two essential things:

1. Avoid wealth destruction

2. Beat inflation (as we’ve seen from the discussion above)

Using 'simple but not easy' tools of mutual funds and discipline, we can invest in successful businesses as Buffett is imploring us, and ensure that we escape inflation's invisible fury.

More on this coming soon.

[1] Average of interest rates on 42 banks' no/lowest minimum balance savings account

[2] Average of 2-year historical CPI

[3] 3-year average direct liquid fund returns as per moneycontrol