Lay Proper Foundation Before You Begin Investing

You need to do a few things prior to starting your investments – akin to preparing the ground before planting the seeds or digging a foundation before constructing the house. If this is not done properly it may affect the growth of your investments.

Restructuring your Debt
You may have taken some loans eg home loan, personal loan, loan against FD / shares etc. Further, you might be having outstanding credit card balances too. You are paying interest on all these loans.

In most cases, the interest being paid will usually be higher (except home loan with tax break) than what you can expect to earn from almost all the debt-based investment options such as Bank Fixed Deposits, Post Office Schemes etc. Therefore, if you have money, it would be more appropriate to first clear all the loans except maybe home loans and thereafter start your investments. It makes no sense to earn say 7-9% on fixed-deposits and pay 15-20% on personal loans.

Equity and property are likely to give better returns. So you could possibly invest in these while you are still paying off your loans. But you must assess the feasibility of this as equity carries some risk; and property is a high-value low-liquidity investment.

Therefore, you should first re-assess your debt portfolio and suitably restructure / repay it depending on your expenses / liabilities and the available investment options.

To re-iterate, one should not invest when the earning is lower than what is being paid on the loans.

Plan for Emergencies
Also, before you begin investing, it is important to be protected against emergencies. Accordingly,

  • you should keep certain amount that is readily accessible such as a savings account or short-term mutual fund
  • adequately insure – both yourselves and your family – for any medical emergencies
  • consider life insurance cover for the earning members to guard against any unfortunate eventualities.

In short, investments should ideally begin only after the insurance and emergency plans have been put in place.

Prepare your Budget
There are two ways we can go about allocating money for investing. The easiest way would be to list down all our incomes and expenses. The net amount remaining, if any, becomes the surplus available for investing.

But this formula will not force us to prioritize our expenses, cut down wasteful expenditure or motivate us to earn more. Moreover, this surplus may not be sufficient to comfortably meet our goals.

The better way would be to first earmark a part of your income say 10-15% for investments. And then manage the expenses within the remaining 85-90% of income. This kind of financial discipline is vital.

Once you have laid this foundation, your investments will turn out to be strong and successful.

Source by Sanjay Matai

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