Do You Want to Start Investing

Every investment guide emphasises how starting early is the key to success. But in reality, there’s a whole lot of effort that goes into the beginning stages before you can actually start investing. In this article, we highlight the key essentials to start investing. Reviewing these basics will help you prudently save funds and invest better.

• Estimating your household expenses and budgeting spends helps save money for investments.
• Building an emergency fund and paying off debts are other investment essentials.
• A long-term perspective can be instrumental in one’s investment journey.

A sound financial plan is essential to start investing. Your financial plan takes into account your current financial situation, goals, risk profile, and time horizon. But before you plot your plan, you need to master some basics. Here’s a list of essentials you need to ace before you start investing:

Estimate household expenses

Budgeting is one of the foremost essentials you need to master before you start investing. For most salaried employees, a significant portion of their income is allocated towards household expenses. Therefore, it’s crucial to track your expenses and optimise spending. Before you start investing, budget your income. Note down income from your salary, bonuses, freelance work, and all other sources. Once you have a clear idea of how much you make monthly, pivot to analysing your expenses.

Review your household expenses including rent, grocery bills, electricity bills, Wi-Fi expenses, subscriptions, and any such recurring costs. Monitor these expenses and look for areas you can cut back on to save funds without compromising on your living standards. For instance, you can unsubscribe from rarely used memberships or switch to LED lights to reduce energy costs. Next, assess your variable spending, which includes expenses like online shopping, app cab booking, and entertainment spends. Tracking and managing your fixed and variable expenses can go a long way in helping you save and invest.

Pay-off debt

You should start paying off debt before you start investing. Clearing your debt as soon as possible clears up funds for savings and investment. Remember that a 10% return from your mutual fund investments will mean nothing if you spend the sum to service high-interest debts. Start with high-interest debts like credit card dues and personal loans. These debts have a high APR, which means your interest dues can rapidly spiral out of control. Devise a plan to tackle these debts with each new paycheck to save and invest better. Add credit card dues and EMIs to your fixed expense ledger to ensure you allocate a fixed sum to servicing your debt obligations every month.

Create a contingency fund

Building an emergency corpus is crucial before you start investing. Life can be unpredictable, and unforeseen emergencies can arise at any moment. Be it a medical emergency or a sudden job loss, you should remain prepared to tackle these situations swiftly. In the absence of a sufficient emergency reserve, you may turn to credit cards to finance such expenses. While it may seem prudent at first, relying on credit extensively can boost your credit utilisation ratio, impact your credit score, and pile on more debt.

Instead, you can start saving for emergencies early with a contingency fund. It may be a liquid fund or a high-yield savings account where you deposit a fixed sum every month to build an adequate corpus over time. Remember, your emergency fund must ideally hold at least 6-9 months’ worth of living expenses. With emergencies accounted for, you can start investing with an added peace of mind.

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Take a long-term perspective

One of the most important essentials to master before you start investing is devising a long-term financial plan. Investing without a concrete financial plan can not just result in confusion, but also lead to wrong investment choices. A long-term plan helps you understand what you want from the investment. Breaking this plan down into smaller, actionable steps helps you identify your goals, target amounts, time horizon, and the best investment instruments to achieve your objectives. Grounding your investments with a long-term perspective helps limit impulsive decisions when the market is volatile.

Seek professional advice

Knowledge and expertise are essential to start investing. If you’re a beginner, you may find yourself floundering with investment decisions. In such instances, it’s best to defer to the judgement of an expert. Seeking professional advice is prudent when you think you cannot manage your finances and plan investments on your own. Experienced financial advisers can help you design a customised plan that suits your needs.

Once you’ve mastered these essentials, you can start investing. Learning how to budget, pay off debt, undertake comprehensive emergency planning, and focus on long-term financial planning can help simplify your investment journey. Once you have enough funds saved to invest, review your investment options based on your goals, risk appetite, and time horizon. Seek professional guidance if needed to fine-tune your investment strategy.