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  • How does the Central bank control inflation?

    You may have heard in the news in the last year, that the Fed has been raising the interest rate. In this post, I will be explaining which is the “interest rate” and how the central bank of the U.S. (the Federal Reserve) does that to control inflation.

    After Jan 2022, there has been a steady rise in prices of many items, esp. fuel, housing rent, and food prices. If you want to understand what inflation is and how it is calculated, you can read my detailed article on inflation here.

    Inflation always happens when there is more demand than supply and when there is an expectation of inflation to continue. Producers raise the price of the goods and services in demand, to make more profit from them.

    The central bank of a country (the Federal Reserve in the US) intervenes when inflation is out of control or is significantly high compared to the target level. As this blog mostly focuses on the US Federal Reserve monetary tools, I use the terms the Fed and central bank interchangeably. However, central banks in other countries also use similar monetary tools.

    Is inflation always bad?

    In the US and many advanced countries, the target average rate of inflation is around 2% every year. This little bit of inflation rate is considered desirable, as it helps borrowers pay off their debt. When there is some inflation, borrowers will have to pay slightly less in purchasing power terms because their money is now worth less to the lenders, exactly by the rate of inflation.

    Additionally, it also motivates people to spend their money on goods and services instead of holding on to them, as their money will lose its value next year by the rate of inflation. So, we get our normal production and consumption, and the economy continues to run smoothly.

    What are the two goals of a central bank and how does it achieve it?

    The central bank uses monetary policy to keep inflation low and promote maximum employment. By maximum employment, we mean the highest level of employment that an economy can sustain while maintaining a stable inflation rate. In the US, these goals are referred to as the Fed’s dual mandate.

    You may ask how the Fed achieves its dual goals. Essentially, the Fed uses its monetary policy tools to start a chain reaction in the economy, each causing one another. In the US, the Fed’s chief body for monetary policymaking is called the Federal Open Market Commission (FOMC). FOMC meets eight times a year and looks at data on current economic conditions, like what is going up and what is going down and how the economy is likely to do in the future based on the data. Based on that information the FOMC makes monetary policy decisions.

    When inflation is high for a long period and unemployment is at a very low level, we call it an overheating economy. The central banks try to raise the interest rates to slow down the overheating economy. This is called contractionary or tight monetary policy.

    Tools of Monetary Policy

    Now, let’s look at the tools the Fed can use to bring inflation down to the stable 2% average rate. This is done in two steps:

    First, the Federal Open Market Committee (FOMC) will raise the target range for the Federal funds rate. This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. This rate is not set by the Fed, instead, it is determined by the market forces of demand and supply between commercial banks.

    On any given date, there are many different transactions in the federal funds market and they settle at slightly different rates, the effective federal funds rate measures the median rate of these transactions.

    FOMC sets a target range for the federal funds rate. In other words, the majority of the banks’ transactions should fall within the target range. Banks with deficits can borrow money from other commercial banks. The next day those banks return the money with a little bit of interest.

    Now, the main task for the Fed is to use its monetary tools so that this federal funds rate goes up because this is the driving force for all the other interest rates in an economy.

    Interest on reserve balance is the main tool

    So, to steer the federal funds rate in the target range set by FOMC, the Fed uses interest on reserve balance as its primary monetary policy tool. The interest on reserve balances rate is the interest received by commercial banks on deposits that banks hold in their reserve balance account at a regional Federal Reserve Bank. This interest rate is a risk-free investment option for commercial banks. This, the interest on reserve balances rate is set by the Fed and is, therefore, an “administered rate,”.

    Interest on reserve balance: Banks can deposit the excess reserve with the Fed risk-free overnight, and earn interest just like you can do with a savings account.

    When the Fed sees the economy is overheating with high inflation and a tight labor market, it tries to slow down the economy by raising the interest on the reserve balance. With that, the banks will be more willing to deposit their reserves with the Fed, rather than lending to other banks in the federal funds market.

    A key point to note here is that the interest on reserve balances rate serves as a reservation rate or the floor rate for banks. This is the minimum interest banks would be willing to accept in order to lend to each other, rather than keeping it with the Fed. If the Fed raises this interest on the reserve balance, commercial banks must raise the Federal funds rate in order to attract other banks to lend to them.

    Another key concept that ensures that the federal funds rate does not fall far below the interest on reserve balances rate is called arbitrage. Arbitrage means simultaneous purchase and sale of funds (or goods) in order to profit from a difference in price.

    So, for example, if we assume the federal funds rate is 1.75 percent and the interest on reserve balances rate is slightly higher at 2.25 percent, banks will see that they can borrow funds in the federal funds market at a lower rate and earn higher interest by depositing those funds at the Fed. They will keep doing that until with the forces of demand and supply, the increase in demand for funds in the federal funds market will cause the federal funds rate to rise. It will keep rising until it reaches the interest on reserve balances rate so that banks no longer see the opportunity to profit by borrowing in the federal funds market and depositing it with the Fed. 

    As the Fed sets the interest on reserve balances rate directly, the Fed can steer the federal funds rate up or down by raising or lowering the level of the interest on reserve balances rate. In fact, this phenomenon of arbitrage makes interest on reserve balances a very effective tool for steering the federal funds rate direction.

    There are two other tools that the Fed can use to guide the federal funds rate

    1. By setting a floor with an overnight reverse repurchase rate,

    2. and by setting the ceiling using a discount window

    Let’s understand both of them.

    The Fed has an overnight reverse repurchase facility that is open to a broader set of financial institutions, as interest on reserve balances is available only to banks and a few other institutions. This facility allows these financial institutions to deposit their funds at a Federal Reserve Bank and earn the overnight reverse repurchase agreement rate offered by the Fed.

    Thus, the overnight reverse repurchase agreement rate does the same thing as the interest on reserve balances rate does by acting as a reservation rate for these financial institutions. If this rate is higher than the federal funds rate, then by pressure of demand and supply, the Federal funds rate starts going up until there is no profit from arbitrage. The overnight reverse repurchase agreement facility is a supplementary tool because the rate the Fed sets for it helps set a floor for the federal funds rate.

    So when it raises the overnight reverse repurchase rate, the Federal funds rate tends to move up as well.

    The discount rate is the rate banks have to pay to the Fed for borrowing money from the Fed through the Fed’s discount window. Banks are more likely to borrow from each other (at the federal funds rate) only if it is lower or equal to the discount rate that they have to pay to borrow from the Fed. Thus, the discount rate acts as a ceiling for the federal funds rate. Also, it is set higher than the interest on reserve balances rate and the overnight reverse repurchase agreement rate.

    Lastly, there is another tool that used to be the Fed’s primary tool to control the money supply in the economy before the 2008 financial crisis. This is called open market operations where the Fed would buy or sell t-bonds. Now, with ample reserves in the banking system, the Fed only uses this as a supplemental tool to help maintain ample levels of reserves. The Fed can buy or sell government securities in the open market to increase or decrease these reserves in the banks account with the Fed.

    In a nutshell, when the Fed wants to control inflation, it would set a higher range for the Federal funds rate. To achieve this target, it would increase the interest on reserve balances rate as the main monetary policy tool. It can also use additional tools by raising overnight reverse repurchase agreement rate, and discount rate. All this will ensure the federal funds rate stays within the high target range set by the FOMC.

    Why does the Federal fund rate matter?

    Since the federal funds rate affects all the other interest rates in the economy, all the other interest rates go up as well. At high interest rates, households will borrow less money to buy big-ticket items they want. This will cause a reduction in spending by households. This will cause overall savings to increase because now they are getting higher interest rate to save money in a bank.

    Once household demand is reduced, firms will reduce their investments. They will also reduce their workforce and demand fewer workers. This will reduce employment levels also and cause the inflated prices to return to the target of 2%.

    The now-raised federal fund rate would cause other market interest rates like mortgage, auto, and other interest rates that banks charge from households and businesses to rise as well. The increased cost of borrowing will reduce spending across all sectors of the economy, lowering excess demand and bringing prices back to normal.

    The Fed will do the exact reverse of this process when the economy is in a recession when the inflation is below the 2% target rate and there is high unemployment. It will lower the Federal funds rate target range by lowering interest on the reserve balance. It can also use additional help from lowering interest on overnight reverse repurchase agreement rates, and discount rates to give a boost to the economy.

    How effective are these tools in reality?

    All these monetary policy tools only work when inflation is caused by demand-pull factors. However, if it is due to cost-push factors, this measure may cause more harm than good. Cost-push factors include supply shocks when the supply of the products is hampered. There could be many reasons for a reduction in supply such as increased cost of raw material and other inputs, and natural calamities. Trade restrictions such as sanctions imposed on a country can also cause supply disruptions.

    Also, there is a direct link between reducing inflation and reducing overall economic growth. Even though central banks aim for a soft landing when they raise interest rates to bring down inflation, sometimes it doesn’t go as planned.

    In economics, a soft landing means a moderate economic slowdown following a period of growth. In the past, the Fed in the US has had a mixed record in achieving a soft landing when it raised interest rates.

    In addition, inflation expectations continue to play a key role in how people react to the contractionary monetary policy. If people continue to believe the prices to go up, they will tend to make the purchases now, rather than in the future when the worth of their money can get further low.

    The board of governors at the Fed, as well as various economists that work there, take into consideration all these factors and keep a watch on the trend. They can alter the monetary policy according to the direction of its performance.

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  • The Fed leaves key policy rate unchanged in Jan 2025: What this means for you?

    Today we will be talking about two important things. First is the Fed’s decision to leave the key interest rate steady in their January 2025 meeting. The second is why the short-run market movements shouldn’t scare you.

    The Federal Reserve decided to keep its key interest rate steady between 4.25% and 4.5%, after cutting it three times since September 2024.

    In its post-meeting statement, the Fed gave a few hints about why it decided to keep rates steady.

    It sounded more positive about the job market. It noted that unemployment has stayed low and the overall labor market remains strong.

    However, it removed a key phrase from December’s statement that suggested inflation was making clear progress toward the Fed’s 2% goal.

    Instead, the Fed acknowledged that inflation is still somewhat high and above their long-term target of 2%

    A strong job market and sticky inflation mean the Fed has less reason to cut rates as of now.

    The statement also reiterated that the economy is still growing at a solid pace.

    Overall markets reacted negatively to it and after a somewhat of a recovery yesterday. Overall markets are having a bad day again as we can see from the charts. All the leading indices are showing a downward trend this week.

    But as an economist, I want to tell you that these short-term market fluctuations shouldn’t scare you as an investor, and here’s why:

    1. Short-Term Panic Doesn’t Equal Long-Term Trouble. Stock prices go up and down all the time. Two days ago, investors got nervous about AI competition. But that doesn’t mean companies like Nvidia or Microsoft are suddenly bad investments. A single bad day (or even a bad week) doesn’t decide the future of a company or the entire stock market.
    1. AI is Still the Future. Yes, a Chinese company released a cheaper AI tool, but AI is a massive industry with room for many winners. U.S. companies still have great technology, resources, and strong customer bases.
      Competition is normal in business—think of how Apple and Samsung both make great phones. It doesn’t mean one will disappear overnight.
    2. Smart Investors Think Long-Term. If you invest for the long run (like years, not days), these short-term drops don’t matter much. They can even be opportunities to buy good stocks at lower prices. The best investors don’t panic when the market moves—they stay patient and focus on long-term growth.

    People who get affected by these daily movements are the day-traders, or people who bet on options, not investors. However, as an investor of a diversified portfolio for the long term, you should be fine.

    So, instead of worrying, use this as a learning moment. The market is unpredictable, but history shows that patience and smart investing win in the long run!
    And to prove this point let’s look at the overall trend in these charts in the last 10 years

    Even with the short-term dips for various reasons, you are much better off investing in a broad-based index fund than trying to time the market.

    This is what seasoned investor Warren Buffet also suggests.

  • What is financial literacy and why it is necessary?

    Imagine having the freedom to live life on your own terms—traveling, buying your dream home, or starting that passion project. But do you know the key to unlocking that freedom? It’s called financial literacy. It’s not just about numbers; it’s about knowing how to make your money work for you so you can focus on what truly matters.

    Financial literacy is about knowing how to handle money smartly—like budgeting, saving, and investing. It’s understanding how your money choices impact your life now and in the future, and figuring out things like credit cards, taxes, and loans.

    Being financially literate empowers you to make informed decisions rather than simply going with the flow or relying on others to make decisions for you.

    The earlier you gain this knowledge the better it is for you. It is surprising to know that high earners and highly educated people also lack important financial literacy when it comes to managing their money.

    As an Indian immigrant who studied economics at USC, I’ve learned that financial literacy is more than just numbers—it’s a tool for taking control of your life. It’s about mastering everyday skills like budgeting, saving, and investing while understanding how your money decisions shape your future. For me, figuring out things like compound interest and insurance options in the US was a game-changer, and it’s empowering to make choices with confidence instead of just going with the flow or relying on others to decide for you.

    Key Concepts of Financial Literacy:

    1. Budgeting: Creating a plan for your money, including income and expenses. You become aware of where your money goes.
    2. Saving and Investing: Learning the difference between saving (short-term goals) and investing (long-term growth).
    3. Debt Management: Knowing how to use debt wisely and avoid common mistakes.
    4. Understanding Financial Products: Understanding how credit cards, loans, and savings accounts work.
    5. Setting Financial Goals: Learning how to plan for major life events like buying a car, choosing between renting or buying a house, or paying for college.
    6. Retirement planning: Using tax-advantaged accounts to save and invest for your golden years.

    Why is Financial Literacy Important?

    Financial literacy isn’t just about managing your paycheck; it’s about building a foundation for your future. Here are a few reasons why it’s essential to be financially literate from the start:

    1. Informed Decision-Making
      Every day, we make choices that impact our finances, from where we buy coffee to how we save for future goals. When you are financially literate, you can evaluate options and choose what’s best for you, and thus avoid costly mistakes and improve your financial security.
    2. Avoiding Debt Traps
      Many young adults fall into debt quickly because they’re unaware of how interest works or the consequences of only making minimum payments on credit cards. Learning to manage debt early can save you thousands of dollars in interest and prevent unnecessary stress.
    3. Building Good Financial Habits
      The habits you form now—like saving regularly, budgeting, and avoiding impulsive spending—will serve you for years to come. Developing these habits early means they become second nature, and this will make it easier for you to reach your goals.
    4. Preparing for the Unexpected
      Life is unpredictable, and having an emergency fund can protect you during challenging times, like losing a job or facing unexpected medical expenses. Financial literacy teaches you how to build and manage this safety net.

    Conclusion

    Financial literacy involves smart money management skills like budgeting, saving, and understanding financial products. It empowers individuals to make informed choices that affect their present and future financial well-being. Being financially literate helps avoid debt, fosters good financial habits, and prepares for unexpected situations, ultimately leading to stronger financial security.

  • Why saving and investing early matters?

    If you are someone who loves living in the moment, spending on what makes you happy today, and feel like saving or investing is just…a buzzkill, then this post is for you. Or maybe you know someone like that? Today, I’m here to show you why saving and investing don’t have to feel like a sacrifice—and how they can make your life better, both now and in the future.

    Don’t believe me, look at the stats first:

    There are a lot of studies and data to support what I am trying to convince you. A recent survey found that 77% of U.S. adults have at least one financial regret, with not saving for retirement early enough being a common concern.

    Another study found that more than half of Americans (53%) regularly save for emergencies, yet many still struggle to cover unexpected expenses, highlighting the need for adequate emergency funds. NerdWallet: Finance smarter

    Furthermore, according to a study done by the World Economic Forum Financial literacy is associated with higher returns on investment and better financial well-being. World Economic Forum

    How saving and investing early is crucial for achieving financial freedom?

    1. Saving & Investing: Think of them as Freedom, Not Sacrifice. First, let me say this: I get it. Life is unpredictable. Why not enjoy it while you can, right? And it’s true—we don’t know what tomorrow holds. But here’s the thing: saving and investing aren’t about sacrificing today. They’re about giving yourself options tomorrow. It’s not ‘either-or’—it’s ‘both-and.’

    2. Balance is Key” with a 50/30/20 rule. Let’s talk about balance. You don’t have to give up everything fun to be financially responsible. One easy approach is the 50/30/20 rule. Spend 50% of your income on needs, 30% on wants, and save or invest 20%. That way, you can still enjoy life now and prepare for the future.

    3. Start small: Let’s not forget the magic of small steps. You don’t have to overhaul your lifestyle overnight. Start small—like saving $5 a day. That’s less than the cost of your favorite latte, but over time, it adds up big! Here’s an example: If you invest $100 a month starting now, in 20 years, you could have over $50,000. And that’s with just a modest return of 8% annually, it could be much higher than that. Compound interest does the heavy lifting for you!

    4: Do you value peace of mind? Now, let’s talk about peace of mind. Life is full of surprises. What happens if your car breaks down, you lose your job, or there’s an unexpected expense? Having savings means you can handle those moments without panic. It’s like giving your future self a safety net. Would you rather be a person who is stressed over a medical bill, or who calmly uses their savings to handle it?

    5. Save for things or experiences that truly bring you joy, like for a dream vacation. Saving doesn’t just protect you from risks; it also helps you achieve your dreams. Whether it’s traveling the world, starting a business, or buying your dream home with a yard where you can host family and friends, saving makes those things possible. So change your mindset, you’re not giving up—you’re building up!

    The key is to spend on what truly brings you joy and save for things that will bring even more joy later. It’s about mindful spending. Ask yourself, ‘Am I spending on what matters most, or could I save for something even better?’

    Conclusion: So, here’s the takeaway: saving and investing aren’t about depriving yourself. They’re about giving yourself more—more freedom, more options, and more peace of mind. Start small, balance wisely, and watch your future self thank you.

  • Investment options for Indian expats living in the US

    Today, I will tackle a crucial question for NRIs living in the US: Where should you invest your hard-earned money? 

    We will explore different investment options in India vs. the US, compare returns, and dive into whether it makes sense to invest in India, especially if you’re a naturalized US citizen. 

    I am not a financial advisor or tax specialist, so please contact a professional if you need specific advice, this post is for general education purposes only.

    I will also briefly touch on the legal formalities you will have to fulfill and the complications of transferring your investment returns between these two countries.

    Investment Options in the US

    The US offers robust investment options for NRIs:

    • US Stock Market (S&P 500 Index): Historically, the S&P 500 has offered an average return of about 10% per year.
    • US Bonds: US Treasury bonds are a secure option with yields currently ranging around 4-5%.
    • Real Estate in the US: With property prices rising in certain areas, you can expect returns of 5-10% annually depending on the location.
    • 401(k) or IRA: Tax-advantaged retirement accounts offer significant benefits, and the average return can range from 7-10% annually depending on the investments chosen.

    Investment Options in India

    There are several avenues for NRIs to invest in India. Let’s look at the most popular ones:

    • Fixed Deposits (FDs): NRIs can open NRE or NRO FDs in Indian banks. These typically offer a 5-7% annual return. NRE FDs are tax-free in India, whereas NRO FDs are taxed at 30% on the interest earned.
    • Mutual Funds: NRIs can invest in Indian equity, debt, or hybrid mutual funds. Equity funds have offered around 10-15% annual returns over the long term. However, capital gains on these investments are subject to taxation.
    • Real Estate: Property investments are another option. In metro cities, real estate offers returns between 6-10% annually. However, rental income and property sale gains are taxable.
    • Indian Stock Market: Direct investment in Indian stocks is possible through the Portfolio Investment Scheme (PIS). The potential returns are around 12-18% annually, but investing in individual stocks comes with significant risks.
    • Government Bonds: These offer stable returns of around 7-8% annually, but any earnings will be taxed.

    Should You Invest in India if You Don’t Plan to Return?

    If you’re a naturalized US citizen and don’t plan on returning to India, you need to consider a few things:

    • First is the Taxation Complexity: Investment income in India is taxable, and you’ll need to report it in both countries under FATCA, increasing your tax filing burden.
    • The second factor is the Currency Risk: The Indian Rupee has historically depreciated against the US Dollar, which can reduce the value of your returns when converted back to USD.
    • Thirdly, limit on how much you can bring to the US: If you earn returns on your investments in India, getting the money back to the US is possible but can be tricky. Indian banks have certain rules and limits on how much money you can send back. You can transfer up to $1 million annually from your NRO account (used for income earned in India). However, this process involves paperwork, such as proving the source of the funds, and you’ll need to follow Indian tax rules.
    • Plus, you’ll need to pay taxes on this income in both countries.

    Here is what I think based on the current data: If your goal is to stay in the US long-term, it may be more efficient to invest in US-based options that are simpler to manage, tax-efficient, and not subject to currency risk.

    If you do plan to invest your money in India, there are some  Legal Formalities and Documentation you need for Investing in India

    • First is NRE or NRO Account: You’ll need to open these accounts to hold and send funds. NRE accounts are tax-free, but NRO accounts are taxable.
    • You will also need a PAN Card for tax reporting purposes in India.
    • Foreign account tax compliance act or FATCA Compliance: if you are a US citizen, you’re required to report your foreign assets to the IRS.
    • Lastly, you will need to meet KYC Requirements: which is the Know Your Customer (KYC) process, which includes providing proof of identity, address, and NRI status.

    But how should your Investment Strategy change if You May Return to India (in the next 5-10 years)

    If there’s a possibility you’ll return to India in 5-10 years, diversifying your portfolio between both countries makes sense.

    And there are two options

    • Indian FDs and Real Estate: These can be good for stable, long-term returns and will provide liquidity when you relocate.
    • US Stock market: At the same time, you can continue investing in US equities to maintain your wealth growth in USD.

    So, by having a balanced portfolio, you can adjust based on where you decide to live.

  • Start investing early even on limited income

    In this post, I want to convince people in their early 20s to start investing, even if they have a limited income. I will highlight the power of compounding, the accessibility of small investments, and long-term wealth growth backed by historical data to support my argument.

    1. The Power of Compounding


    If a 22-year-old invests just $100/month into an index fund with an average annual return of 8%, they’ll have over $383,000 by age 62.
    In contrast, if they start investing at 32 and contribute the same amount, they’ll only have $174,000 by age 62.
    Takeaway: Starting 10 years earlier results in $209,000 more, even with the same contributions.

    So, as we saw compounding works better with time, the earlier they start, the longer their money grows exponentially. Also, it doesn’t matter how little you start with, even a small amount invested early often beats larger amounts invested later.

    2. Investing Doesn’t Require Huge Income

    A common belief people have is that they need to earn 100k or more to start investing. This is far from being true. Many brokerage apps like Robinhood, Fidelity, or Vanguard allow people to invest with as little as $1. ETFs like Vanguard’s VOO (S&P 500 tracker) have no minimum investment if purchased fractionally.

    One of the ways to do that is by reallocating small expenses like $5 daily coffee runs:

    • $5/day × 30 days = $150/month.
    • Investing this monthly could grow to $575,000 in 40 years (assuming an 8% annual return).
      So, as we saw, even tiny sacrifices can snowball into a significant nest egg.

    3. Opportunity Cost of Waiting

    The economist in me has to bring this up – opportunity cost, which means the best use sacrificed. Do you know that if you wait 10 years to invest, you would have to contribute 3x more monthly to catch up?

    When you Invest at 22, $100/month for 40 years, you get $383,000.

    However, if you wait and start investing at 32, $300/month for 30 years, you will only get $379,000

    Skipping investing early means people can lose the “free growth” from compounding during their 20s.

    4. Risk Appetite in Their 20s

    Another big reason to start early is that most young investors can afford to take risks because they have decades to recover from market downturns. This is the best time to invest in higher-growth assets like stocks, as opposed to bonds or savings accounts, which pay less returns.

    Historically, the S&P 500 has returned 10% annually on average. Even with the short-term volatility, long-term investors consistently benefit as seen from the upward slope of the S&P 500 index from its inception till date. If you look at any 8-year window picking any two data points, it has always gone up.

    In the following section I will give you a step-by-step breakdown of how to start investing in your early 20s:

    Step 1: Open an Investment Account

    First, you need a platform to start investing. The two most beginner-friendly options are:

    1. Roth IRA: A retirement account with tax-free growth and withdrawals (best if you qualify based on income).
    2. Brokerage Account: A general investment account without restrictions on withdrawals.
    • How to do it:
      1. Research platforms like Vanguard, Fidelity, or apps like Robinhood or M1 Finance.
      2. Sign up online, which would take 10-15 minutes.
      3. Link your bank account to transfer money.
    • Pro Tip: Choose platforms with no account minimums and low fees.

    Step 2: Start Small (Even $10 a Week)

    Small, consistent contributions add up over time due to compounding. You don’t need a lot of money to begin.

    • How to do it:
      1. Determine an amount you can comfortably set aside. For Example, you can start with $10/week or $50/month.
      2. Use the platform’s fractional investing option to buy partial shares of ETFs or index funds (like Vanguard’s VOO or SPY).
    • Pro Tip: Here is a real-life example, if you spend $10 weekly on streaming services, consider cutting back slightly to reallocate this toward investing.

    Step 3: Invest in Low-Cost Index Funds or ETFs

    These funds spread your money across many companies, lowering risk and giving reliable long-term growth.

    • How to do it:
      1. Search for funds like S&P 500 ETFs (e.g., VOO, SPY) or Total Stock Market Index Funds (e.g., VTI).
      2. Click “Buy” on your app and input the amount you want to invest (e.g., $10).
      3. Confirm your purchase.
    • Pro Tip: Look for funds with low expense ratios (fees below 0.1% are good options).

    Step 4: Automate Your Investments

    Automation ensures consistency, making investing a habit without needing effort.

    • How to do it:
      1. Set up recurring deposits from your bank to your investment account (e.g., $50/month).
      2. Enable auto-invest for specific funds to keep investing the same amount regularly.
    • Example: You won’t even notice $10 disappearing each week, but your portfolio will grow quietly over time. Dollar-cost averaging is an investing technique, where you invest a fixed amount every week or month without worrying about market movements.

    Step 5: Track Progress & Stay Consistent

    Seeing growth (even small) will motivate you to stick with investing. But remember, it is investing and is done for the long term. Don’t let the short-term market fluctuations affect you emotionally.

    • How to do it:
      1. Check your account monthly or quarterly—not daily! Markets fluctuate over the short term and some months or years you will see a dip in your investments. But if you have invested in a diversified group of companies, significant growth starts happening after 5 years of investing consistently. The longer the better.
      2. Increase contributions as your income grows. For example, you can gradually contribute more. Go from $50/month to $100/month when you get a raise.

    Final Note:

    If you follow these steps:

    • Investing $10 a week with an 8% annual return can grow to $87,000 in 30 years.
    • But gradually increasing your contributions will multiply this amount significantly.

    The key is starting now—every year you wait, you lose out on making compound interest work in your maximum favor. Time in the market makes a big difference!

  • If I Wanted to Become a Millionaire in 20 years, I’d Do This

    When I moved to the U.S. from India 20 years ago, I had big dreams but little money. After earning a degree in economics from USC and working in consulting in Los Angeles, I realized something critical: making money isn’t just about hard work—it’s about strategy. So, if I had to start over today and wanted to become a millionaire in the next 20 years, here’s exactly what I’d do.”

    Step 1: Define a Clear Goal and Timeline

    First, I’d calculate my target. To hit $1 million in net worth in 18-20 years, I’d break it down: 

    We’re assuming you’re starting at age 22, straight out of college you landed your first job, with $0 saved. You’ll have 18 years to invest, aiming for an 8% average annual return, the historical return of a diversified stock portfolio like the S&P 500 net of inflation.

    How Much Do You Need to Save?

    To hit that $1 million mark, you’d need to save $1,300 per month.

    This is based on the math of compound interest:

    • So you have a $1M goal (future value)
    • 8% annual return (that’s 0.667% monthly)
    • And you have 216 months (18 years)

    So, start putting away $1,300 a month consistently. I know it seems like a lot, especially in the first few years but read this post till the end as we will go over the steps to do that. 

    Graph Growth Development Improvement Profit Success Concept

    Here’s what your journey looks like:

    • Annual savings: $1,300 × 12 = $15,600
    • Over 18 years, you’ll contribute a total of $280,800.
    • Investment growth through compounding adds $719,200.

    That’s how your money grows to hit $1 million!

    If you are starting later?

    Let’s say you start at 25 and have 15 years instead. You’d need to save about $1,800 per month to reach the goal.

    If you are Saving less?

    If you can only save $500/month, you’ll need higher returns, around 12%. But be cautious—higher returns mean higher risk! So don’t invest all or most of your money in very high-risk assets like individual stocks or crypto. Even though crypto is at an all-time high, I still stay away from it.

    Let’s say you save $1,000/month for 18 years:

    • So your Contributions: are $216,000
    • Investment growth at 8%: will make it $577,000
    • So Total is: $793,000

    To close the gap to $ 1 million, either increase your savings later in your life or aim for slightly higher returns, like 10%.

    If this is not possible, then Here’s how to adjust your savings strategy

    Start Small, Increase Over Time
    Begin with $500/month, which grows to approximately $146,000 in 18 years at an 8% return.

    To reach $1M, increase your savings by 10% yearly as income grows (e.g., from raises or promotions).

    • Year 1-4: you save $500/month
    • Year 5-9: you can manage to save $732/month (a 10% annual increase)
    • Year 10: you save $1,175/month and gradually increase as much as possible

    This gradual increase allows you to build momentum without straining your budget.

    Also, Invest in high-growth, diversified assets (e.g., index funds) during the early years to maximize compound returns.

    Make sure to Plan for Major Lifestyle Changes

    • If you get Married: You can Combine finances and align saving goals with your partner. Joint contributions can reduce individual pressure.
    • If you have Children: You will need to Prioritize family needs but maintain consistent savings. Use tax-advantaged accounts like 529 plans for education while preserving long-term investments.

    Also, make sure to revisit your plan yearly to adjust for income, expenses, or life changes. Even minor increases (e.g., $50/month) compound significantly over time.

    “If you save aggressively, invest wisely, and create multiple income streams, this is achievable. Let’s move to step two.”

    3. Step 2: Learn a High-Income Skill

    “Consulting taught me one thing: people pay for specialized skills. If I were starting fresh, I’d pick a high-demand skill—like coding, digital marketing, or even financial consulting—and master it in 3-6 months. In my industry, the mid-level people make $300K a year. 

    So, I can talk about my industry but it applies to whatever your industry may be in, I’d learn AI-powered financial analysis tools and position myself as an expert for small businesses needing strategic advice.”

    4. Step 3: Create a Scalable Income Stream

    “Next, I’d focus on something scalable. In addition to my day job. Like freelancing over the weekends or at night, if possible, launching an online course, or starting a YouTube channel, just like this one.”

    For Example:

    “If I taught personal finance or shared my journey from $0 to $1 million, I could monetize through ads, sponsorships, and affiliate links.”

    Step 4: Save and Invest Relentlessly

    “Making money is one part, but growing it is another. I’d adopt the ‘pay yourself first’ rule, saving 50% of my income if possible. Then, I’d invest aggressively in low-cost index funds, rental properties, or high-growth sectors like AI.”

    The formula is simple: Start early, save consistently, and let compound interest do the heavy lifting. Even if life throws you curveballs, you adjust your savings and investments to stay on track.

    Step 5: Network Like a Millionaire

    Opportunities don’t knock—they’re created. I’d attend local entrepreneur meetups, connect on LinkedIn, and offer my expertise to build relationships with like-minded

    “Sometimes talking with the right person could lead to a profitable partnership or even seed funding for a business idea.”

    Step 6: Avoid Lifestyle Inflation

    “Lastly, I’d resist the temptation to upgrade my lifestyle too soon. Drive a reliable car, live modestly, and focus on reinvesting profits into building wealth.” the key is to achieve financial freedom where my passive income becomes almost equal to my active income.

    “Instead of splurging on a new $1,000 phone, I’d invest that money—it could turn into $2,000 or more in a few years.”

    Some of you might have heard in the news about a janitor in the US, who had millions of dollars of net worth after he passed away. It was not about how much he made, but it was how he managed the money. Some highly educated people also don’t know how to manage their money. 

    So “Here’s the truth: becoming a millionaire isn’t easy, but it’s possible. With the right skills, smart investments, and disciplined habits, you can build the life you want, you can achieve financial freedom where you don’t have to work to support your living, you can work on following your passions.

     So, if I can do it at age 42, starting as an immigrant with a dream, so can you.”

  • 10 most searched personal finance questions and their answers

    Today, I am answering the top 10 most Googled personal finance questions. Whether you’re just starting or need a refresher, these are the questions everyone is asking—and I am giving you the answers!” So make sure to read till the end, you will learn something new.


    Question 1:     “What is a debit card?”

    A debit card is a card linked directly to your checking account. Money is immediately deducted from your account balance every time you swipe it. Unlike credit cards, there’s no borrowing involved, which means no interest payments!

    Question 2:   “How much money do you need to open a savings account?”

     The amount you need to open a savings account varies by bank, but typically, you can open one with as little as $25 to $100. Some banks even let you start with no minimum balance, so be sure to shop around!”

    Question 3: “How do you use a line of credit?” 

    “A line of credit is a flexible loan you can access when you need it, up to a certain limit. You only pay interest on what you borrow, and you can draw from it as many times as needed. It’s great for emergencies or large expenses, like home repairs!”

    Question 4: “What is a budget?”

    “A budget is a plan for your money. It helps you track your income and expenses so you can make sure you’re not overspending. The goal is to allocate your money effectively—some for savings, some for bills, and a little for fun!”

    Question 5: “What is an APR?”

    “APR stands for Annual Percentage Rate. It’s the interest rate you pay on loans or credit cards, expressed annually. This includes not just the interest but also any other fees or costs involved, helping you compare the true cost of borrowing.”

    Question: 6 “How to invest?”
    Start with low-cost index funds or ETFs. Diversify your money across stocks, bonds, and other assets. Make consistent contributions and hold long-term for growth.

    Question 7: “How to make money?”
    Pick up a side hustle, start freelancing, or invest in stocks. You can also create digital products or start a small business.

    Question 8: “Should I pay off my credit card or save?”
    If your credit card has high interest, pay it off first. If your interest is low, balance paying off debt with saving for emergencies.

    Question 9: “What size mortgage can I afford?”
    A good rule is that your mortgage should be no more than 28% of your monthly income. Factor in taxes, insurance, and other costs too.

    Question 10: “What is a W9 form?”
    A W9 form gives your Taxpayer Identification Number (TIN) to a business or person so they can report payments to the IRS. It’s commonly used for freelancers and independent contractors

  • Why Do New Year Goals Often Fail, and How Can You Fix That?

    If you ever set a goal with high hopes, only to see it fizzle out, you’re not alone.

    Studies reveal that a staggering 92% of people fail to achieve their goals. For instance, this study by the University of Scranton found that only 8% of people who set goals manage to achieve them.

    In this post, I will share the common reasons why goals fail and what actionable steps you can take to avoid that.

    You can also watch my YouTube video on this post here.

    Ok the first reason is when you have

    1. Vague Objectives:
      • When we have unclear goals like “I want to be better at X,” these are not specific, which makes them hard to achieve.
    2. The second reason is a lack of accountability:
      • When we don’t share the goal with a trusted friend or family member, there is no one to remind us if we sway. Without someone to hold us accountable, it’s easy to lose motivation because we are not answerable to anyone.
    3. The third big reason is the lack of a clear plan:
      • If you Set up a goal without a roadmap, it can lead to confusion and inaction.
    4. Lastly, Setting Unrealistic Goals can cause us to fail at achieving our goals:
      • When we aim too high without a realistic plan, it can lead to discouragement.

    How to Set Goals That Work:

    1. Create Specific Goals

    Specific goals give you a clear direction. When I say, “I want to write an e-book,” it feels overwhelming and vague. But if I break it down, it will be clear. So, instead of saying, “I’ll write an e-book,” I will say: “I’ll write a 125-150 page e-book on personal finance for people in their 20s by April 1, 2025, by working on it for 1 hour each day.”

      Being specific helps you know exactly what success looks like and what steps you need to take.

      2. Create an Action Plan

      To achieve your goals, you need a roadmap. Break down your larger goal into manageable tasks:

      For example, for the e-book, I will create a detailed Outline of my chapters by January 7, 2025. Then I would Draft one chapter every week starting January 8, 2025. I would edit two chapters per week beginning  March 2025. Lastly, I will Finalize formatting and cover design by March 25, 2025, to publish the book by April 1, 2025

      So basically set deadlines for each task and track your progress weekly.

      3. Set Realistic Goals

      The next important step is to be mindful of the difficulty level. Goals should challenge you without overwhelming you.

      Giving the same example, for me writing a 100-page e-book in three months is realistic if I commit an hour daily, but writing a 300-page book in the same time frame might not be. Similarly, writing a bi-weekly blog post is achievable, but trying to write and add one new article daily could lead to burnout.

      So be honest about your time, energy, and other commitments, because, quality matters more than quantity.

      4. Limit the Number of Goals

      It’s tempting to tackle everything at once, but spreading yourself too thin reduces your focus and effectiveness. Instead, focus on 2-3 major goals at a time. For example, I should prioritize the e-book and then move to the newsletter. Once those are running smoothly, next year I can consider adding new projects like online courses or another e-book.

      5. Write Down Your Goals

      Documenting your goals makes them tangible and keeps you accountable. You can create a vision board or use a goal-setting app like Trello or Notion. For instance, I will write: “Publish my e-book by April 1, 2025,” and “Send out my first newsletter by July 15, 2025.” Make sure to review these goals daily or weekly to stay on track.

      I strongly believe seeing your goals in writing gives you clarity and motivation. You can make your goals the wallpaper of your device for added reminders.

      6. Seek Support

      You don’t have to do it alone. When you Share your goals with others, it provides encouragement and accountability. For my goals this year, I will share my e-book milestones on YouTube, Instagram and TikTok. I will ask for feedback from my viewers or invite them to beta-test my newsletter. Additionally, I will reach out to my mom as my mentor to check in with me weekly.

      For example, this is what I would post on my social media platforms: “I’m writing an e-book on personal finance for people in their 20s! Any tips or feedback on what you’d like to see?” This builds engagement and motivates you to deliver.

      In summary, by being specific, creating a plan, setting realistic goals, focusing on a few priorities, documenting your objectives, and seeking support, you’ll turn your ideas into reality without feeling overwhelmed.

      Remember, setting goals is just the beginning. With clear, realistic objectives and a solid plan, you can join the successful 8% who achieve their aspirations.

    1. How to build an emergency fund, even if you’re on a tight budget?

      I know saving money can feel impossible when you’re living paycheck to paycheck, but trust me, it’s doable. I will show you how to save money fast, even if you’re working with a low income.  So read till the end!

      First things first—why do you need an emergency fund? Life is unpredictable. Whether it’s a sudden car repair or a medical bill, having some money set aside can save you from stress and debt. An emergency fund is your financial safety net.

      You don’t need to save thousands overnight. Start small! Even $5 a week adds up. The key is consistency. Make it a habit to put aside whatever you can, whenever you can. It’s the small steps that lead to big changes.”

      Set a realistic goal based on your income. For many, $500 is a good starting point. Eventually, aim for 3-6 months’ worth of living expenses. But don’t overwhelm yourself—focus on reaching that first milestone. Set small, achievable savings goals. Instead of trying to save a huge amount all at once, aim for something like $10 a week. It might not sound like much, but over a year, that’s over $500 saved! Every little bit adds up, and hitting those small goals keeps you motivated.

      One of the easiest ways to save is to automate it. Set up automatic transfers to a separate savings account every payday. This way, you won’t even miss the money, and your fund will grow on its own. Automating your savings can make it easier to stick to your plan. Set up an automatic transfer from your checking account to your savings account each time you get paid. This way, you’re paying yourself first, and you won’t even miss the money

      Take a close look at your spending: Are there things you can cut out?

      Make a list of your monthly expenses and separate them into ‘Needs’ and ‘Wants.’ Your rent, utilities, and groceries fall into the ‘Needs’ category, while things like dining out or streaming subscriptions go under ‘Wants.’ Focus on covering your needs first and see where you can cut back on the wants.

      Next, track every dollar you spend. You can use a simple notebook or a budgeting app—whatever works best for you. This will help you see where your money is going and identify areas where you can save. For example, you might notice you’re spending $50 a month on coffee—cutting back to making coffee at home could save you a lot!

      Maybe make coffee at home instead of buying it, or pack lunch instead of eating out. Redirect those savings into your emergency fund.

      You don’t have to cut all pleasures from your life, but if you don’t have an emergency fund and are trying to save money for that, it makes sense to give up a few things for some time until you build enough savings to handle at least 3 months of your living expenses.

      Reducing your utility bills is another quick way to save. Simple things like turning off lights when you leave a room, unplugging electronics when they’re not in use, and setting your thermostat a few degrees lower in the winter or higher in the summer can really add up.

      When it comes to groceries, shop smarter. Always make a list before you go, and stick to it. Look for sales, buy in bulk when it makes sense, and try store brands—they’re often just as good as the name brands but cheaper. Also, avoid shopping when you’re hungry—you’ll be less tempted to make impulse buys.”

      Use Bonus to boost your savings

      Did you get a tax refund or a bonus at work? Instead of splurging, put a chunk of it into your emergency fund. Windfalls are a great way to give your savings a boost.

      Make sure your emergency fund is in a separate account—preferably one that’s not too easy to access. This will help you avoid the temptation to dip into it for non-emergencies.

      If you can, find ways to bring in a little extra income. This could be anything from picking up a side gig, selling items you no longer need, or even freelancing. The extra cash can go directly into your savings, helping you reach your goals faster.”

      Lastly, keep yourself accountable. Share your goals with a friend or family member who can check in with you, or use social media to track your progress. Knowing someone else is rooting for you can make a big difference!

      Building an emergency fund takes time, so be patient. Stay committed, and adjust your savings plan as your income changes. Remember, the goal is to be prepared, not perfect.

      Start small, stay consistent, and before you know it, you’ll have a financial cushion that brings you peace of mind. Remember, every dollar counts, and the effort you put in now will pay off in the future.