5 Things You Must Do Before You Start Investing
Investment is one of the principal factors for enhancing wealth corpus. There are plenty of investment instruments available in the market with their respective pros and cons. Depending on the financial goals, tax planning, and other requirements, it depends on the choice of the investor to choose the investment mediums. But before settling for any mode of investment certain factors need careful consideration.
Before You Start Investing
- Maintaining a Household Budget
The primary step towards having a successful investment platform is to keep a close watch on the flow of incomes and expenses. This habit curtails the tendency of reckless expenditure but provides a coherent picture of the inflow and outflow of the financial resources. Keeping a physical record of the daily transactions is the ideal process to do this. Moreover, budgeting will make the allocation of funds under different heads easier.
Once this habit is begun, it becomes a handy tool in the way of financial planning. The savings pattern will easily allow us to plan short-term and long-term investments. Which heads will require to cut down the funds and which will require more can be easily decided with the maintenance of a physical monthly financial record.
The thumb rule of investment says to follow the 50-20-30 rule. 50% of the income should go towards regular living expenses including the grocery costs: 20% of the fund towards short-term, mid-term and long-term goals and the remaining 30% for the occasional long-term expenses like travelling. The outflow and inflow of the financial resources also depend on the age of the investor.
- Get Rid of Debts
Concrete financial planning is required to get rid of any debt as soon as possible. The interesting factor of any loan creates a considerable financial burden that affects the financial health in the long run. Both types of loans like constructive loans—home loans, and unconstructive loans—car loans, personal loans, credit card loans, etc. Getting debt-free is one of the most significant aspects of creating a successful investment portfolio. With continuing debts, financial planning does not receive a concrete form and affects the wealth corpus in the long run, prohibiting its future enhancement.
- Considerable Protection
The investor must make sure that before beginning any sort of investment, that the medical costs, the residing place and the existing assets are well protected. Insurance is the most effective instrument in this respect. Guarding against unprecedented medical costs is one of the wise aspects of efficient and effective financial planning and investment.
Any sudden medical expense or hospitalisation costs is enough to drain out a significant financial resource, deeply affecting the monetary base for a considerable period. Moreover, any early or untimely death factor always runs. Creating considerable provisions considering all these factors is a sign of efficient financial investment and planning. Term insurance is the key to success here. Here, the sum assured is payable to the nominees in case of the sudden death of the holder. The term plans are considered to be low-premium and high-cover plans.
Under financial terms, the thumb rule is to maintain a life cover of at least 7 times the total annual income. Planning for long-term goals will further strengthen future risk-taking efficiency.
- Emergency Fund
Life can take a bitter twist at any point of time in the form of accidents or unprecedented medical treatments. Without the existence of an active and applicable emergency fund, investment planning with long-term goals in mind is considered to be futile under expert financial perspective. This is because any sudden heavy drain of wealth is sufficient to jeopardise the financial health for a significant span. Under such circumstances, one is optionless but to choose to break the existing savings for tiding over the situation. But this solution is not ideal and deeply affects long-term financial health, making it difficult to stay afloat.
As emergency situations require immediate attention, therefore it is best to manage the emergency fund in liquid form. Sweep-in fixed deposits, savings accounts, and liquid mutual funds are considered to be ideal tools in this respect.
- Target-oriented Plans
A well-chalked out set of financial targets is one of the significant factors of financial planning and investment. This sort of well-planned itinerary helps to make maximum utilisation of the available resources. At the same time, recognising the priorities of life and planning accordingly is another important aspect in this respect. This ensures better fund management and optimum fund utilisation.
Summary
Financial planning for wealth creation is a part of investment planning. Once there is proper investment planning, then effective fund allocation depending on the goal horizon and the risk appetite becomes easier.