Before investing or spending a single rupee, make sure you have a stable financial base and then only take the next step of investing.
There are a few things you need to do to fix your financial position before you start investing. Most people make the mistake of not taking care of their dues and debts before starting to invest. Before investing or spending a single rupee, make sure you have a stable financial base and then only take the next step of investing. For instance, make a budget, create an emergency fund for unforeseen rainy days, get coverage for yourself and family and then start investing. Not only limited to millennial, but many middle-aged people also make this mistake.
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Here are a few important things that should be considered before starting to make an investment.
- Create a budget – Do not start investing without a budget in place with your regular expenses, which is ignored by most. Getting a proper budget in place will help one to arrive at the amount of investible surplus after taking into account the total household income and expenses. If both the members of a family are working, while estimating monthly income, including the salary of both spouses. Also, look at rent, interest income, or dividend if any. On the expenses side, include all expenses such as school fees, transport cost, groceries, loan EMIs, outings, travel/vacation, miscellaneous, etc. You can also segregate them into monthly, quarterly, half-yearly and on annual basis for better clarity. This way you can tap your spending habits and might also cut down some of them. You can also use the household budget, thumb rule: ’50-20-30 Rule’, wherein your 50 per cent of income should go towards living expenses including groceries, 20 per cent towards financial goals and the balance 30 per cent towards another spending, including outing and traveling.
- Get rid of Debt – Any form of debt, be it a home loan or unconstructive debt such as personal loan, car loan, or even a credit card outstanding balance, plan to get rid of all of these first. What most of understand is that the interest paid towards debt eats into the return that investments generate. For instance, if you earn 11 percent on your investments and pay 11 per cent on your personal loan, the net effect doesn’t create wealth. Hence, till the time the debt is repaid in full, keep paying EMI’s on time. Try to prepay even your loan as early as possible, especially a home loan. Experts suggest the total EMI’s including home loan should not be more than 50 per cent of one’s take-home salary.
- Set goals – Before you start investing, know what are you investing for. That way you can differentiate between short-medium and long term goals. You can categorize them with different durations and then start investing. For example, if your goal is to save for child higher education, estimate its current cost and then inflate it to estimate the actual amount required after say 15-18 years. Finding out the exact requirement will help you invest the right amount, not more not less.
- Build a contingency/emergency fund – This is one of the first and an important step before you start investing. No matter how careful you are at managing your money, there could be an emergency, a sudden job loss or uncovered medical expenses, which could turn over your finances. In order to meet such events, having an emergency fund in place is necessary. This fund is created over a period of time and not at one-go. Towards this goal, it is suggested to park at least 6 months of household expenses in a bank savings account or a short-term liquid fund.
- Get coverage – We all know medical costs are spiking. Hence, before you start investing, ensure to get adequate coverage for both yourself and family members. It can be either through an individual health insurance plan or a family floater health plan. Experts suggest one should have insurance cover of at least 10 times of one’s income. If you do not have an insurance cover, in case of a medical emergency, you may have to dip into your investments, which can impact your long term savings. Note that in case of financial dependents, try to get adequate insurance by opting for a pure term insurance plan.