Before embarking on an investment plan, do the ground work so that you have the money to invest and the proper mindset to stick to your plan.
As stock market indices are touching lifetime highs, people are looking to invest in shares. Before investing, one needs to do some ground work which will help in the long run. Here are a few points which you should consider before investing in anything, apart from your provident fund or saving bank account.
Focus on net worth
Net worth is nothing but the excess of what you own over what you owe. It is the total value of everything you own like your home, car, bank balance, valuables, minus all debts such as housing loan, car loan, credit card outstanding. So, your attention should be on this number and ways and means to make it larger. Checking your bank balance is a short-term perspective whereas focusing on your net worth is a long-term perspective.
Pay off high interest loans
If you have any high-interest loans, say, above eight per cent interest rate, first pay them off. If there is any credit card balance outstanding pay that too. There is no investment that offers you a return that beats what you will save from paying off your credit card dues. It will have an immediate positive impact on your net worth because it is not being held back by interest payments and finance charges.
The difference between your income and spending is known as surplus or investable amount. There are only two ways to increase this surplus: spend less or earn more. Focus on spending less money so that you can see the result quickly. Avoid spending on things that are purchased and quickly forgotten.
Create an emergency fund
Life will not progress as we planned. Unexpected events such as losing a job, falling sick, car breakdowns can happen to anyone. In such a scenario, one should not turn to credit card as these are not the best solution. It is a good idea to create an emergency fund. It should be used only in emergencies which do not upset your bigger financial plans. The best way is to provide a standing instruction to your bankers to transfer a smaller amount weekly or monthly from your main savings account to a recurring deposit or another savings account that would not affect your budget but will accumulate into a reasonable amount rapidly.
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Take your spouse on board
Any investment plan you intend to take on should be discussed in depth with your spouse. Discuss in detail on what exactly is the investment plan and what you hope to achieve. Tell your spouse where these investment vehicles are and in whose name. It is essential to have this conversation with your spouse before you start investing, else you will face trouble down the road as your spouse notices the money vanishing into an investment account.
Social circle matters
We, humans, are strongly influenced by by our immediate social circle. Who are the people you see most often, especially outside of work? Are they constantly buying new things and talking about their latest purchases? If you find yourself in such a social circle you should strongly consider changing your social circle. Spend some of your free time at gatherings of people with a stronger financial perspective.
To conclude, do not dive into investing without fulfilling the things on this list. Follow the above steps and start investing in the right note and you will never stumble.
The writer is associate professor of finance & accounting, IIM Shillong.