5 Things You Must Do Before You Start Investing
- DetailsWritten by PolicyBazaar -
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Updated date : 26 July 2019
Where to Start from?
Start investing if you don't have enough funds. Your investment funds should never be that which you have saved up for paying your rent or bills. While most people prepare their budgets and income and expenses charts, unless you know how much money you have got, you can't even think of investments.
Having that Financial Planning Process in Place
Without a proper financial planning process in place, your money is bound to go down the drain. But what many people miss out on, is how to develop one that works. Every one of you out there is in a different financial position. So, the process of planning your financial goals and needs should be made around this position: most people today make some decision or the other. Some go their way, and some go awry.
But that shouldn't stop anyone from making them especially in managing their money. A well sketched-out financial plan considers all aspects of one's financial goals, including your current financial situation, possible future financial situation, any financial goals you may have in mind, evaluating the possible and alternative courses of actions, implementing the financial action plan and reevaluating and revising that plan.
A well-planned financial process not only frees you of any financial worries in the near or distant future but it also helps you attain those financial goals. Now, there are many risks and uncertainties in any financial plan. But having the means to tackle these problems should be part of the aim of these investment options in India.
Taking action doesn't mean that the process is done, or that your goals have been met. Rather, it's another step towards achieving your goals, and particularly, your long-term goals. So, there is a need to revise and review your financial plan. The financial planning process isn't just a onetime thing. It aids you in adapting to any changes that occur in your financial status as life moves on. So, it's very important that you sketch out your financial planning process.
What should you do before you start investing?
Investing your money is a part of the financial planning process. However, the process doesn't begin with it. It's not that hard to prepare a groundwork to start your investments. By spending time and effort, everyone will achieve it. Here are a few things you should know before you make your first investment plan.
1. Sketching out a Household Budget
This is the first step because the household budget determines how much you are left with, which in turn determines whether you can start investing. To prepare this budget, you will first need to jot down a plan on a piece of paper, which includes your sources of income, which could be a salary, a rental income, interests, dividends, etc.
The next logical step in planning the household budget would be the expenses. These could range anything from groceries, fuel bills, electric bills and any other such expenses you have got. To get a better understanding of the budget, you can break down your income into monthly expenditures.
Once you have the basic structure of the budget, you will then need to check and identify your spending patterns over a few months. This will tell you where you can cut down on your spending so you can save more for your investments. Using this plan and the spending pattern, you can then move on to planning your investments.
2. Getting Rid of any Debts
The earlier you get rid of your debts that have been hanging around, the faster you make more money by starting your investments. Let's say you gain around 10 per cent per year from your investment portfolio. However, you get nothing out of it if you spend that same 10 per cent to waiver off your debts.
There are two forms of debt. The first form is called the unconstructive loan and includes any personal loans, credit card, car loans and more. The second type is called constructive loans. This includes things such as home loans which have an interest rate of about 9 per cent and any personal loans which have interest rates starting from 13 per cent to 18 per cent.
And then there's the outstanding balance of credit cards, which hover anywhere between 36 and 48 per cent a year. So, with all these to take care of and more, you better pay off all your debts so that you can make more money from your investments.
3. Having a Cash Emergency Fund
Life doesn’t always go the way we want it to. This holds good for all our financial plans and dreams. Although you may have a good financial plan ready, it may slump for various reasons and inevitable circumstances.
In most cases like these, people become low on their cash flow. And so, they turn to their next best choice. At least what they think is their next best choice. Their credit cards. These aren't, however, the best possible solution for the cash crunch. If you happen to be in some financial recession of your own, then your banks may well get your credit cards cancelled.
So, this calls for having an emergency cash reserve in place. To do this, you can try setting up an online savings account. You can then set your primary account up to transfer a nominal amount that won't break your bank into this online savings account. In time, this account will build upon some wealth, which you can use for your investment or any other emergencies.
4. Figuring out the Bigger Goals
The key to a good investment plan is to never invest without having an end goal. Now there are tons of reasons you should do this. But the most prominent of them all is that you don't know how long your investment periods should be. Not to mention you don't know how much risk you should take as well.
For example, if you are considering investing in, let's say, the stock market. Now we know that the stock market is volatile for short-term investments. However, if you look at the bigger picture, meaning, if you happen to make a long-term investment here, then you notice that the markets will be stable. So, investing in the stock market for a longer period can bring you a lot of money.
However, in case you need money fast, or have only those short-term goals in mind, then investing in stocks makes no sense. So, in this way, you need to assess what kind of goals you have in mind and make a plan.
5. Getting Advice
If you're not sure about how to get started, then get advice from an expert in the field. A financial advisor is just the person you need if you want to steer your financial plans towards your goal. The financial advisor will guide you through the entire process of planning your investments, right from identifying your financial goals, all the way through to the end goal of that investment plan.
Getting Started with the Actual Investment Plans
This is the final step toward creating that immense amount of wealth you have always wanted. Once you know why you're investing and the end goal of your investment plan, it is now time to carry out that plan. You got to take on any challenges that might come your way during the implementation process. Your investment plan should guide you to your destination. And that is the end goal of your investments or what, or rather, how much you intend to make out of the investments.
It would be easier if you can break your investment plan down into smaller goals and achieve them as a first step. This will not only lead you to your goal but will also help make the task easier. A financial plan is not the same as an investment plan. However, when you make a financial plan or a goal, rather, you are automatically also making an investment plan.
A financial plan is the bigger picture here and serves as an aid for your investment plan. So, once you have a financial plan in place, you can focus on your investment plan by assessing things such as your risk profile, the investment horizon, and the end goals you want to achieve from these financial and investment plans.
Although many investors feel they can sketch out both a financial and an investment plan them-selves, it is obvious that most of them fumble at some point or the other. However, you also need not to seek the help of a financial advisor or expert for the entire journey of your investment plan. Getting an input at the beginning will suffice in most cases.
The rise or fall in the value of your investments doesn't depend on your getting advice from an expert. Rather, it depends on various other factors, among which, the market conditions are one of the most prominent ones. Most of the times, however, your returns may be way less than you anticipated.
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