Even before starting to invest your hard earned money, here are a few key things to consider to keep your finances in control.
Money management starts with taking care of household budgeting and goes a distance in having a financial plan in place for your long term goals. No matter what your income is, what matters is how much you are able to save as a percentage of your income. To start with, have a close look at your current financial position. Even before you start investing a single rupee, have a proper financial plan in place. It gives you a better control on your personal finances depending on your specific circumstances. What are your sources of income and where is your money being spent – is it more on discretionary expenses which you can manage better?
Initially, when you begin investing, an important step will be towards creating an emergency fund. As a thumb rule, start building a corpus equal to about six months of household expenses to meet any financial exigency. Such an emergency fund can be in a mix of bank savings account, short term or liquid funds.
Next, look at your total debt portion and if there are any personal loans or credit cards outstanding, make a plan to prepay or close them as early as possible. Avoid rolling over credit card dues in order to save interest cost.
After creating an emergency fund and taking care of debt, you will be in a better position to create wealth over the long term. Another crucial aspect of personal finances will be to take care of risks – life and health risks. Get adequate life insurance coverage preferably through a term insurance plan and also buy health insurance coverage for all family members.
Now comes that part of your personal finances that will help you meet your long term goals comfortably without having to borrow from any lenders or other sources.
Draft the short-medium and long term goals that you need to meet over the next few years and later on after a decade. Make use of investment calculators to find out how much you need to save towards them after factoring in the inflation. And yes, do not ignore savings towards retirement as it will require a lot less to save than other goals, yet help you retire comfortably.
Based on your risk profile and number of years to goals, have a diversified portfolio across equity, debt and gold. Within debt, you may invest in PPF and debt funds for medium term goals, while sticking with equity funds for goals that are far away in future. Choose to go through SIP mode of investing in equity funds and keep adding funds as and when stock market sees a correction or dips considerably. Over the long term, the markets drift upwards and rewards from equities only over longer periods. Keep reviewing performance of MF schemes and start the derisking process when you are 3-5 years away from goals. Nearing goals, shift funds from equities to less volatile debt funds and you are home!