Before you start investing there is a list of things that you need to sort out in order to make wise investment decisions. From getting the paperwork sorted to figuring out where you need to invest this guide has it all. While this might not be an easy task, once it’s done you would have set your foundation for all future investments.
Step 1: Know Where You Stand Financially
By understanding the 3 S’s- Sources of Income, Spendings & Savings
Sources of incomes- First list out all your sources of income whether you’re a salaried professional, a housewife, a businesswoman or even a freelancer.
Spendings- Then list out all expenses under it. These expenses could be classified into necessities and luxuries or fixed and discretionary. Example: House rent is a fixed monthly expense and a necessity, paying for a movie could be a discretionary or luxury expense.
Savings- Lastly, calculate how much you end up saving per month. If you’re barely saving anything then that spells trouble and you’ll desperately need to cut down on a few unnecessary expenses and luxuries. Brutally speaking- learn to live within your means!
By learning what you Own a.k.a your assets
Make a list of all the property, gold, jewellery, shares, investments, insurance under your name. You might not know a lot of this information if your father, spouse or someone else is managing your money for you, but it’s pretty relevant if you want to know where you stand financially. Especially for someone who wants to start investing, understanding what they own is crucial because it will help them make the right investment decisions. For instance, if you do not have a house to live in, this might be your priority and you’ll make investment decisions according to this priority. Another important priority is health cover. In case you do not have a health insurance plan, consider getting one because medical expenses are rising and you can’t anticipate when an illness will hit you. Each one’s priorities might differ depending on their financial standing, that’s why you cannot ignore this step. You must ask relevant questions about what you own to the concerned person.
An excerpt from our interview with Livemint editor Monika Halan,
Ask simple questions like-
- How much do we spend each month?
- How much income flows in?
- Where do the savings go?
- In whose names is this invested?
- Where are the papers?
- Am I a joint owner of assets?
- In whose name is the house?
By learning what you Owe a.k.a your Liabilities- A large part of your investment decisions will depend on how much you owe meaning all your loans, EMI’s, credit card balances that you need to pay. Ideally, you should pay off all your debts before you start investing, but this can vary.
Consider this situation: You recently got a pay hike and realized you’re saving a lot more even after paying all your EMI’s, interest on loans etc. At such a point does it make sense to prepay the loan or continue paying interest rates till the maturity date?
If the returns made by investing your savings will be more than the interests you owe on your loans then you should invest it and continue paying your loan till maturity. In case it’s a home loan you can even enjoy the benefit of saving taxes because you can deduct it from your taxable income.
But if the returns aren’t higher than the interest payments then pay off the loan before, especially high-interest rate debts like car loans, credit card debt. During this time you can create small savings plans like a bank deposit or an emergency fund that is liquid and stable but don’t invest in fluctuating assets like shares. Only, once your debts are repaid you can invest in risky and volatile assets like shares
Step 2: Know What You're Investing For
You could be saving for a holiday, a car, a house, your child’s education, retirement, etc. Each of these goals can be divided into short-term goals or long-term goals. For instance, a holiday is a short-term goal but saving for retirement is a long-term goal. Once you’ve divided your goals into short and long-term goals you’ll know how to divide your savings and invest them into different assets.
For example since a holiday is a short-term goal you’ll need the cash for it within a few months, so save your holiday money in assets that can be converted into cash quickly. In other words invest in liquid assets like bank deposits, short-term mutual funds, or liquid funds. Meanwhile, don’t forget to put some money in long-term assets like shares for your long term goals like retirement.
After deciding your goals, consider your risk taking capacity. If you are planning to invest in shares know that they are risky and you could lose some or all of your money in them. But greater risks mean greater returns. There are 3 major assets where you can invest-stocks, bonds and cash. Historically, the returns of all 3 have never come down at the same time. That’s why it’s safe to invest in a variety of assets because if one performs badly, the rest will protect your funds.
Money advise we gained from our chat with portfolio manager Aparna– ‘Don’t Keep All Your Eggs In One Basket’. By this, she meant to diversify your money into different assets so that if one performs badly you don’t lose all your money.
Step 3: Put Your Plan Into Action
After step 1 and step 2 it’s now time to put your plan into action. To make sure you stick to this Monika Halan suggests keeping two bank accounts- One for your expenses and one for your investments. This will ensure you don’t dip into your investment account for your expenses. Every month try to save a portion first and then make all your expenses. This is popularly called as the ‘Pay Yourself First’ budgeting method and lot’s of experts swear by it.
Step 4: Get Started
DIY-Do it yourself- To start investing by yourself you’ll first need a DEMAT account to hold all your investments in an electronic form. Just follow the steps in this article to open one. Once this is done you’re good to go. If investing in shares intimidates you, start off by investing in shares through mutual funds first.
Hire an expert to help you out- For any advice on your investment decisions, you should hire a financial advisor to help you out. But if you feel like you don’t have the time, confidence or expertise to invest on your own despite getting advice from an advisor then you can hire a portfolio manager who will manage your money for you by charging a fee.