3 Things to Do Before You Start Investing

A lot of people are often fearful about the ideas of financial investments and presume that it’s an ‘adult’s job’. However, financial planning and investments in fact has got little to do with age. The younger you start investing the better you reap benefits at a later stage.

But, even before you start investing, there are a few things that one needs to fix, so as to ensure that financial investments fall properly in place. Explained below are a few things that one needs to keep before they start investing.

1. Maintaining a Household Budget

The first step towards ensuring proper investment is to work out and maintain a household budget. A household budget helps you arrive at the amount of investible surplus after taking into account the total household income and expenses. These include you monthly compensation (salary or any other major source of income that you might have), dividends, rental income or any other regular source of income that you might have.

Thereafter, make a list of expenses incurred in a month and allocate money to each of these heads. Include everything, from the grocery bill to the fuel expenses to the EMIs on various loans. For a better picture, break down the quarterly, half-yearly or annual income and expenses to monthly basis. 

Once you start following the household budget, it becomes easier to manage rest of your finances. Commenting on the importance of a maintaining a family budget, certified financial planner, Chenthil R Iyer said, “Having a budget helps one to become aware of the realistic expenses that the family has. This also acts as a benchmark for people to transfer the surplus after budgeted expenses upfront into an investment account so that accumulation does not suffer due to arbitrary and haphazard expenses. This will enable them to identify the true saving potential for each month.”

Preparing and sticking to a budget is anytime very helpful. The idea is to create outflow buckets for better control. Individuals may tweak the percentage according to their age, circumstances. The idea is to follow the same rule for long and stick to a plan.

2. Being Completely Debt Free

Being debt free is of utmost importance when you are considering meticulous financial investments. If an investor manages to generate a return of, say, 12 percent per annum from one's investment portfolio but pays a similar percentage as interest towards a loan, the net effect is not helping him create wealth. Avoid unconstructive loans as much as possible. These usually include car loans, personal loans and credit cards; home loans are also another form of debts. A home loan comes at around 9 percent while personal loans could range between 13 percent and 18 percent per annum. The interest rate one pays on the outstanding balance of credit cards (after rolling-over) is in the range of 36-48 percent per annum.

Therefore, the first thing that one needs to do as an investor is to do away with all kinds of debts. Being debt free will not only give you a sense of freedom and thereafter help you invest in a calculative manner. Commenting on the importance of being debt free, Iyer stated that, “There is no fun in having to take a personal loan @15% interest for some need after having paid off the home loan which was at 9%! Also the credit worthiness of an individual is determined based on how systematically the person is paying off the existing loans.

So, if one makes systematic payments such as EMIs, it helps to create a dependable credit history. I do recommend people to increase their EMI payments every year by the same rate at which their income increased. This helps in accelerating the loan repayment in a systematic way.”

Shaping one’s credit history is very significant in order to ensure proper financial investment.

3. Have an emergency fund in place

Unless and until you have a proper emergency fund in place, planning financial investments might get a bit tardy. Life’s unpredictable and calamities can strike anytime. Whether it is medical emergency or any other like a sudden job loss, one needs to fall back upon something for support. Ready monetary funds can always come to the rescue. In the absence of an emergency fund, one may have to either borrow from friends, relatives or take a personal loan and service it by paying interest. If the requirement is huge, one may even have to pledge gold to tide over the situation.

While financial planning and investment planning go hand in hand, one must understand that there are certain subtle differences between the two. Financial planning is only a part of the latter and needs proper attention to ensure a holistic investment planning.