Should you prepay your mortgage?

Should you over pay your mortgage? Or maybe just go ahead and invest that extra money elsewhere?

The decision between investing extra cash or prepaying your mortgage is one of the most debated topics in personal finance. You've received a raise, optimized your budget, or come into a lump sum—like 8,00,000 from an inheritance—and now face a choice: put that money toward reducing your home loan balance, or invest it elsewhere for potential growth? Both sides have passionate advocates, and the "right" answer depends heavily on your personal circumstances, risk tolerance, financial goals, and current economic conditions.

This isn't a one-size-fits-all decision. It can be approached rationally through numbers and assumptions, but emotions play a big role too—especially how you feel about carrying debt. Some people sleep better knowing their home is closer to being fully owned, while others prioritize building wealth through compounding returns. In personal finance, there's rarely a perfect path, only the one that aligns best with your life. Let's explore the key factors to help you decide thoughtfully.

At its core, the choice boils down to opportunity cost. Prepaying your mortgage is like earning a guaranteed "return" equal to your home loan interest rate (since you avoid paying that interest going forward). Investing elsewhere offers the potential for higher returns but with risk and no guarantees. Add to that the worry about the debt you carry.

Let us assume you have an mortgage with an outstanding tenure of 17 years. If you prepay 8,00,000 now against your mortgage that costs you 8% pa (as an example), you reduce the principal immediately. This shortens the loan tenure or lowers future EMIs (depending on how your lender applies it), saving a significant portion of future interest—especially powerful early in the tenure when interest forms a larger part of each EMI.

Alternatively, if you invest that 8,00,000 and earn a compounded annual growth rate (CAGR) of 12% over the remaining 17 years, it could grow substantially—potentially to several times the original amount (far outpacing the interest saved on the loan in many scenarios). Meanwhile, you continue paying the original EMI, but the investment grows independently.

On paper, if your expected investment return exceeds your mortgage rate, investing often wins mathematically. Historically, equity mutual funds have delivered long-term returns in the 12-15% range for diversified portfolios, though past performance isn't a guarantee. Debt funds or fixed deposits might offer lower, steadier returns closer to or below current home loan rates.

Several variables tip the scales: Your mortgage interest rate — The lower it is the stronger the case for investing. The key factor being the spread between your mortgage rate and the expected return from your investments.  Remember that here our decision will be based on the estimated return and the actual return may be higher or lower. Investing carries market risks. The return that you achieve over the years could be lower thus nullifying the assumed benefits. The other factor is the remaining loan tenure. Longer tenures amplify compounding benefits of investing. Prepayment saves more interest early on due to amortization (interest-heavy payments initially).

But one needs to keep in mind the psychological impacts also.   Debt aversion is real! One may prefer being debt-free sooner for mental freedom.  What if you lost your job?  Or your circumstances changed in the future thus impacting your ability to repay? Reducing debt even at the risk of reduced returns or wealth creation is a good place to be in if it means less stress about the future.  Remember, circumstance can change midway. What if your circumstances change for the worse like redundancy or reduced earnings? Often, the near term risks can overshadow the long term gains. Peace of mind is often not given enough importance while we are busy driving our careers and ambitions. It is something we don’t appreciate until we don’t have it. 

So that big question again?  Should one repay the mortgage with the extra cash or should one invest that amount instead? Many experts recommend a middle path: allocate part of the surplus to prepayment (for peace of mind and interest savings) and part to investments (for growth). For example, prepay enough to reduce your EMI or shorten the tenure modestly, then invest the rest in a systematic way. Or maintain an emergency fund first, then split extra cash.

What would you do if you had a mortgage and came across some extra cash at the end of the month?  Or if you received a hefty bonus at work? What would you do? 

  

Financial Independence for women

Traditionally financial planning has been left to the men. This is something that comes naturally for men in our society.  Will it be beneficial if more women got involved in financial planing and their own financial independence? This is not just beneficial but necessary. 

Financial planning has traditionally been a male domain. This is probably due to their traditional roles as the main or sometimes the only breadwinner in the family. The success of a man has been measured by his financial success and how much money he makes and this has shaped our thinking. But today as more and more women venture out into the work place, a good understanding of financial planning has become important. In fact financial planning has become even more important for a home maker.  It is high time women change their relationship with money and get to know how to manage money with confidence. 

Whether you're single woman, married, or in a relationship, knowing how to handle money is vital. Women should be financially independent because relationships should be equal. A woman should be able to handle money independently. Education in financial planning is critical for a woman in the modern context.

Change your mindset and relationship with money. Start to be involved in decisions related to money. I know many men who would love their partners to be involved in the money decisions to be taken. But this needs to begin with you; the woman. Discuss the family's financial status. Understand where the money is getting invested. 

Improve your financial literacy. Find out all you can about money terms, investing, saving, and anything that you feel you need to understand. Click on the various topics shown on the right of this blogpost and read the various posts. YouTube is a great resource for improving financial literacy.

Set up an independent financial goal. A goal doesn't need to be grand. It could be a small achievable goal to save and invest a small amount each month. Be consistent. Keep increasing the monthly saving each year. The magic of compounding is a very powerful concept. Often the small investments in the early years feel trivial but as you keep building your investments, the compounding effect accelerates the growth of your money. 

Start an SIP.   The SIP approach is a very simple automated process to building huge wealth over the years. It takes away the indiscipline that we are often victims of.  Schedule your SIP a day after your salary gets credited into your bank account. This way your investment get priority over all other expenses. 

Become financially independent. The ultimate goal is to be independent financially. And the most critical part of this process is to start your plan as early as possible. In the modern world, it is very important for a woman to be financially independent. Build your own corpus. 

Being financially educated and working towards your financial independence will make you a confident person. It will have many other positive impacts in your life. 

Try it. 

Financial freedom is not early retirement

 

Work towards financial freedom. But don't equate financial freedom with the idea of retirement

Many of us will have had a thought at some point in our life about hitting the jackpot and then retiring comfortably.  This is often something people dream of.  We dream of being finally free from financial stress and constantly worried about our future income. But does financial freedom necessarily need to end in retirement? 

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One of the big mistakes we make in out thought process is to see retirement as the end goal of financial independence. Without doubt, financial independence allows you to retire from the day job. But importantly, the end goal of financial freedom is to gain time. The time to do stuff that one dreams of. Financial freedom allows us to choose what to do and when without the stress of working towards an earned income. We no longer need to exchange our time for a salary.  Our time can be spent doing things we love. And that could well include our current job that we love to do. 

Retirement on the other hand can be a very risky decision if taken at the wrong time. Retirement reduces our physical activity. Retirement reduces our mental activity. And often retirement reduces our social activity. These changes can lead to deterioration of our physical and mental health.  I have seen many people go downhill after retirement and this is often due to take of regular activity to keep the mind and body stimulated. Hence retirement is an important decision to take at the right time.

Hence achieving financial independence early and equating that with retirement can be a risky situation.  Work actively towards financial freedom. That doesn't need to end in retirement

 

F U Money

A few years ago, I was fired.  Not because I was a poor performer. It was just that my boss and I had our differences over certain business policies that he had implemented. I knew instantly that these policies were detrimental to the business and I stood my ground. In the end, the company decided to let me go. But that itself is not the point.

It is in moments like these that FU Money becomes important. You may have guessed what the F and U in the term FU Money stood for. And it means exactly that. I had not heard of the term when I was fired from the job but got to know of it much later. I remember reading about the term FU Money in a blog written by the legendary JL Collins. FU Money gives you the space to take a break if required. It lets you do what you want and work when you want to. Often we are prisoners of our work places. We are literally chained at our ankles and we cannot leave. Many would be financially challenged if they lost their job. We are prisoners at work. Only until we find our FU Money. 

By the time I had lost my job, I had already set aside my FU Money. Adequate money to keep me afloat for a few years. Enough to stop me from being over anxious about my financial needs. FU Money gives you the confidence to do what you want. It takes away the chains around your ankles. Do you have your FU Money today? 

    

Size does matter!!

Sit back and look at how you spend your money. Often almost 40% of the money that we spend can be saved. Just writing down our expenses each month is a good place start. It makes you aware of where your money goes. And more importantly it makes you aware of the money that can be set aside to build your FU Money. Each month work aggressively to build your FU Money. Put that money to work. Invest it wisely. And let the returns from your investment get reinvested. And the cycle goes on. Very soon you will begin to breath better. You will realise that you have FU Money set aside that can tide over any eventuality or even give you the chance to do other things. Once you have your FU Money you will feel the shackles fall off your ankles.  It will set you free. 

FU Money should not be confused with financial freedom. That will be a long distance ahead. FU Money just cushions you from a fall. It gives you the confidence to literally say just that.  F U.

Investment Myths

 One needs to be stock picker

One needs to be a stock picker

Often we hear of investors who are constantly beating the crowds. A cut above the others. The investors who beat the index by far.  The super investors. This constant barrage of information of other investors beating the market by cleverly selecting the winners leads us to believe that we all need to be super investors too.

And here in lies the biggest risk that most investors expose themselves to. The feeling that the only way to win in the investment process is by picking the winning stocks. And very often these winning stocks happen to be recommendations from random acquaintances. Can everyone really pick the winning stocks? The process of selecting multibaggers can be daunting.  The path can be full of landmines. Not everyone can be a Warren Buffet. And yet almost everyone wants to be one and many even believe that they need to be one.

A safer path for most investors is to diversify the risk by buying the entire market or a broad index. In the words of the legendary Jack Bogle, buy the haystack. In other words, don't try to pick stocks. Instead buy the index or the broad market. A safer and yet a rewarding approach is to buy the entire market. Ride the wave of the entire market. Often referred to as Index investing, the key principle is that instead of taking on the risk of choosing the winning stocks, it is better to buy the entire index. 

The concept of index funds was made famous by Jack C Bogle, an american legend. He argued that a safer for the retail investors was to buy an index fund which represents a group of stocks that represent a broad set of industries and sectors. By investing in index funds, one takes away the risk associated with specific stocks and only aims to replicate the returns of the market.

Watch my video about The Principles of Investing by Jack Bogle

In summary, successful investing does not require you to be stock picker. Not everyone needs to be a Warren Buffet or Vijai Khedia. You can achieve tremendous success in investing by not being a stock picker and exposing yourself to a huge risk. Take the less risky path. Buy the index and sit back and relax

Read this other very interesting blog post, Buy The Hay Stack

Saving is key

 Success is not about taking that bold step in the future, it is about taking the small steps now.

Saving is probably one of the most important habits in life. This is the first step towards your long term financial security and ultimately your financial independence. There is no substitute for saving. And hence the moot question. How much of what you earn gets saved?

I often hear people say that they cannot manage to save by the time the month ends. And this may be true in some cases. But in my experience, most of us can save a part of our earnings. While the size of our savings has a huge impact in the long term, the first step is to be aware of and having that intent to save.  Getting into the habit of saving and a mindset of saving is a very important first step. 

The early years need to be focused on building an initial corpus. One needs to build a sizable base as quickly as possible as this is important for the magic of compounding to kick in. Read about the importance of size in my previous post Size Matters. Hence developing a saving habit is very important. Just like your health, your financial health is dependent on the daily decisions that you make everyday. 

Here are a few ideas that will get you started on your journey towards financial security.

1. Set a budget: Setting up a budget is the most important start. Setting up a budget does not necessarily mean being stingy or depriving yourself. The process of budgeting makes you aware of the various things you spend your money on. It allows you to prioritize the important stuff and may be leave out the not so important stuff. How much do you plan to spend on rent? How much of your earning is allocated to groceries? And that most important question. How much of your earning do you intend to save at the end of the month?  Set up your goal for saving. Don't stretch yourself too much as setting unrealistic objectives will get you off the rails before you have even started. Setting up a fair and realistic goal is extremely important for a sustainable budget. Getting into a saving habit is much easier than you think and setting up a budget is a great way to get started.

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2. Spend less : Spending less does not need to be a negative thing. You need to decide which expenses are important and which are not. You can still go ahead and buy something that makes you feel good. But among the many things that you buy everyday, you will find opportunities to eliminate many items from your shopping list. You will be surprised about how many items you will be able to eliminate from your monthly list once you get into the mindset of saving. Shopping around is also a great way to cut down on your spending. While you may have set a reasonable budget for your groceries, check for prices and value across the supermarkets and brands. You will discover new stores and brands that provide a better value and cost significantly less. 

3. Separate your savings: Often we find that moving the targeted savings amount out of the current account is a great way to build the discipline. Right upfront, move your targeted savings amount to a new bank account. As soon as the salary gets credited to your account, transfer your planned savings to a separate account. Once it moves out of your salary account it is likely to remain safe and out of reach.

4. Avoid debt: We all fancy the luxuries of life. If you can't afford to buy them with cash, you can't afford them. Never ever take a loan for depreciating assets. Like a car or the new TV. A loan is a sure way to disrupt your savings process. Aside from this, debt have several others risks associated with it. It is prudent to avoid all debt in the early years.

5. Set up an SIP: An SIP ( systematic investment plan) is an automated process of investing your savings on a periodic basis. I personally love the concept of an SIP and have used it extensively. you can set up a process of automatically investing a fixed amount into any mutual fund of your choice.  Watch my video about the process of SIP here

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The risk of over ambition

 " A genius is the man who can do the average thing when everyone else around him is losing his mind"

                                                                                    - Napoleon

How often have you experienced anxiety which stems from an exaggerated target return? For most people, the slow and steady approach to investing is a much safer bet versus the over ambitious route. Many times we get influenced by exaggerated claims of success that we see on social media or even within our friends circle. 

I guess this issue has become even bigger in this social media driven world as we get bombarded with all sorts of news and information. Even more dangerous are the so called social media influencers supposedly living fancy lives after huge investing success (are they?)

Having fair and reasonable expectations from your investments is a key factor that can make or break your long term success. How we behave and react to the constants noise is a very critical factor. In the investment process, a high IQ is not very important but a strong EQ is. Doing well with money doesn't require a lot of intelligence but it definitely requires a calm and composed mind. 

It is a vicious circle. The more you get stimulated by outside noise, the more you tend to up your own ambition. And more you keep pushing yourself harder, the more likely you are to make stupid investment decisions. 

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Focusing on average returns can be very rewarding. It eliminates the risk of anxiety and stress of overachieving. It eliminates the poor decisions usually associated with over activity. Very few among us will be as successful as Warren Buffet. Staying focused on average returns is far more important in the long run.

"The line between 'inspiringly bold' and 'foolishly reckless' can be a millimeter thick and only visible in hindsight" 

- The Psychology of Money

Index Funds

 Investing in index funds has long been considered one of the smartest investment moves you can make. Index funds are affordable, enable diversification, and tend to generate attractive returns over a longer period of time. 

The biggest benefit of an index fund is the elimination of personal bias. It takes away the complexity of selecting specific companies to invest in and rides the general growth of all business within the index. In other words, the fund invests your money into all the companies in that index based on the weightage that each company holds in the index. It is assumed that fund managers who manage active mutual funds are smart enough to know which companies to invest in and which ones to avoid. However historical data suggests that over a long period of 10 years or more, there is little to choose. Very few active funds will have beaten the index. While some active funds will beat the index, the question is which ones? 

Time is your friend Click here

Another important reason to invest in an Index fund is the diversification it provides across various industries, companies and business cycles. Remember that an index itself is a self-correcting one. Over the period, poorly performing companies will be eliminated from the index while well performing companies get added. This provides a vast diversification of the fund. 

The most important advantage of an index fund is the low cost. Investing in an actively managed mutual may entail an annual cost of 1% to 2% which is taken from your investment fund. In other words, the fund house will deduct that amount each year from your fund. This is referred to as the Total Expense Ratio (TER). Now imagine the impact of this on your investment compared to the TER of an index fund which may vary from 0.15% to 0.3%. This has a huge impact on the total outcome say at the end of 15 or 20 years. Read about the value of 1% here.

In summary, index funds are an excellent route to building wealth over the long term. Could other active funds beat the index funds? Sure. A few will. Alas if only we have that crystal ball to know which ones! 

Need to talk about Index Funds? Leave a comment below.

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How not to invest

 A lot is said about how to invest. We spend a lot of time trying to become the next Warren Buffett, trying to identify the next multi bagger. I know of a lot of folks who brag about their investment ideas. But to become a good investor, the first gate one needs to cross to know how not to invest. 

In a game of cricket, the real stuff happens on the pitch. And in the dressing rooms. What really matters is the strategy the team has in mind, the batting line up, the bowling statistics etc. And yet the focus often remains on the cheerleaders. They are nice to look at. The draw a lot of attention. At the end of each over, they dominate the screens. And yet they have no impact on the final outcome. Investing is a lot like that. 

Imagine there is a hardware shop in the village that has been operating for a few years and is now on sale. Would you buy the shop only based on the village gossip? And if you did decide to go ahead with the purchase, how much would you pay? Would you want to know how many customers it serves? Would you not want to know how much profit it makes? Or may be it is running losses? 

Would you go ahead merely based on the fact that he has a good looking daughter?  That is what is referred to as hype. Often people depend on the hype while taking investment decisions. With little reference to business fundamentals. Just like a game of cricket, the cheerleaders don't matter. They have no impact on the final result of the match. Remain focused on the game.

Before you invest ask questions about the business. In a sense buying a share of a company is like buying a small part of the hardware shop. Find out if the company is making profits. How consistently has it made profits over the last few years. What does the future hold? Is the company's future protected? How efficiently is it run? How good are the returns on the capital it has deployed? What is the company's position in the industry it operates in? Is there any risk to the company's business in the future?

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This post is not about what to do. It is about what not to do. Don't make decisions based on a random comment or hype. Do research. Understand the company, Understand the industry. Look for signals about the company's future profits.

In the end the cheerleaders don't have any impact on the final outcome of the match

Buy or rent?

 I am sure this is a very emotive subject. The perennial debate over buying versus renting a home evokes profound passions. I have come across very extreme positions on this subject and I am sure we will continue to see some very strong opinions depending on which side of the argument you sit. Choosing to either buy or rent has a big impact on your financial health, lifestyle and personal goals. 

Let us commence with the allure of homeownership. It is general common wisdom that buying a house is a good investment. Undeniably, the merits abound. Owning a house is an Indian religion and a dream for most families. But often the emotive side of owning a house is passed off under the garb of a sound financial decision. Don't get me wrong. There are a lot of strong advantages in owning a house. First of all it has huge social value within the community. One gets a perceived higher status within the community as a home owner.  It also provides an anchor, the opportunity to completely renovate and customize one's den. It takes away the hassle of constantly moving in case the landlord doesn't want to extend the contract. Moving house frequently also impacts the children; having to move away from their close friends and always needing to make new friends. 

But purely from a financial perspective, how does the money invested in a house stack up against other investment options? 

A decision to buy a house have several advantages. Aside from some of the points mentioned above there a few financial points that need to be considered. With modern day mortgage facilities, buying a house gives an option to slowly build equity. This works specially well for people who don't have an inherent discipline to save and invest; it forces an obligation to allocate money to the mortgage thus forcing one to save/invest. It forces you to make the monthly mortgage payment thus slowly building equity. Hence for people who do not have the discipline to save/invest, buying a house works as a proxy for long term savings. But I guess this is where the benefits kind of stop.

First of all, buying a house is a huge anchor. In many ways, it anchors you to the city and locality. In today's mobile world is this something you would like to tie yourself down to? This anchor will eventually shape your decisions around mobility and taking up new career opportunities should they arise. This holds specially true in the early years of your career as you maneuvre around and try to climb the organization hierarchy.

But the most important perspective will be in terms of the trade offs. Would you be better off persueing other investment options for a better return and accelerate the wealth building process in the initial years? With the level of monthly saving / investment remaining the same, the initial rate of return in the early years have a huge multiplier impact on the final outcome. Hence it would be prudent to compare the estimated returns say from mutual funds versus the net rate of return from an investment in property. Needless to say the net rate of return will vary from city to city although the difference may not be significant across most places. I refer to the net rate of return  as one needs to account for the cost of a mortgage, taxes, the initial transaction costs etc. 

Based on my experience and looking at the calculation mentioned above, I recommend renting a house in the early years and diverting your funds to equity related investments. As I have written here, building that initial base fund is extremely important and hence the initial years are best used to build that based fund. However this only works if you have the discipline to regularly invest and work actively to build the initial base fund. As I have mentioned above, if you don't have the discipline you may be better off taking the plunge and paying month EMI as a proxy for building your initial base fund. Remember that buying a house comes with a lot of long term responsibility and takes away a fair amount of flexibility in your decisions. Moreover, instead of paying the EMI (which includes a significant amount of interest cost in the initial years), the initial years can be better untilized to invest aggressively into an asset class like equity or mutual funds, thus getting a head start in building your wealth. 

Time is your friend

Very often the focus of any investor is on the returns and the choice of asset class. How often have we had a coffee machine chat with our colleague at the office about the fantastic new investment deal he did. The most often chatter is usually about the next multi bagger stock that has been identified. While the chatter around the stupendous profits from cryptos have died down in recent times, I am sure you would have been inundated with talks of the big profits that everyone earned.

While the choice of asset class and finding the multi baggers is important, an oft neglected factor is the time. Time is an important factor and nay I say an extremely important factor in the investment journey. It takes little intelligence or skill. And yet it is the one that most of us miss out on.

How many of us can confidently say that we made the best use of our investment opportunities in our twenties? Did you maximize your savings and investments when you were in your twenties? Just a handful will be able to say so. Most of us miss out on our best years; the early years of our productive life. 

10,000 invested at an age of 25 is significantly more powerful than the 10,000 invested at the age of 35. I will illustrate this with an example below. 

The simplest trick in the book is to invest aggressively in the early years and then sit tight for as long as required. You can watch my video about the Magic of Compounding here.

In order to understand the power of time, lets look at the illustration below. Now in order to understand the illustration we need to make a few assumptions. These are just assumptions and you can use your own assumptions and rebuild the illustration. But whichever way you look at it, the inference will be the same. That TIME is an extremely important factor in the investment process.

Let us assume the investment journey of 2 young people. Let us call them Jim and Jane. 

Jim is a carefree soul. Always out to have a good time. He lives the high life in his early years. He doesn't have any savings and hence does not begin his investment journey until he turns 35. He begins investing at the age of 35 and continues investing monthly investments until he turns 60.

On the other hand, Jane is a lot focused on her savings and investments. She starts saving and investing her income as soon as she starts working at the age of 25. In other words she invests for 36 years until she turns 60.

In order to keep this calculation let us assume that each of them invests 1,000 per month during their investment process and both earn the same annual return of 12% pa. Of course these are plain assumptions and you can use your own. 

If each of them invests 1000 per month and earns 12% per month, the below is the final output at the ends of their respective investment period. For the sake of simplicity, the below illustration assumes that the monthly investments are made in a lump-sum amount at the beginning of each year and that the return is compounded on an annual basis.

Now I understand you will already have many questions! Very valid ones. Wouldn't they be able to increase their monthly investments as they progress in their career? Is the rate of assumed rate of return as fair one? 

As I mentioned the the illustration is based on simple assumptions. You may use different ones. But without fail the outcome will show you that the person who begins investing early ends up in a much stronger position at the end of the investment process. 

So who would you want to be? Jim or Jane.  Comment below and let me know your thoughts. 

Size Matters

 This is something I heard from a former line manager almost a decade ago

 "100% of nothing is still nothing"

 At the time I was working in sales a lot of our business review meetings used to track percentage growth. It was in this context that he had mentioned those those wise words. Size does matter. 

 Which is why in the investment process building that initial corpus is so critical. We often get bogged down by conversations around percentage returns and constant investment activity. This may involve constantly churning the portfolio by trying to chase higher returns. And herein lies the problem. How many times have you heard a friend or an office colleague wax eloquent about a recent investment they made only to find out that they own a mere 10 or 20 shares? While I understand that we all need to start somewhere, these shares will do little or nothing even if the returns are significantly high. In other words a high return against a small investment will still be small. 

 The initial years need to be focused on building the base. Save aggressively even to the point of depriving yourself of some luxuries. Remember the magic of compounding starts looking very interesting only once you have built a certain base value of your portfolio. A 10% return on 1 crore equates 10,00,000 while a 20% return on a portfolio of 1,00,000 he's a mere 20,000.

 Hence as you begin your investment journey remain focused on building the size of your portfolio. Once you have built a reasonable size even an average return will be substantial. But to get there your focus in the initial years needs to be on extreme savings and investment. Once you have built your initial capital there is no looking back.

How not to invest. Click here