The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "The best way to teach your kids about taxes is by eating 30% of their ice cream." ~ Bill Murray

Lay Proper Foundation Before You Begin Investing

You have to prepare the ground before planting the seeds. Else you won't get a good crop.

You have to lay proper foundation before constructing the house. Else you won't get a safe home.

Likewise, you have to set certain things right before you start investing. Else you won't get a profitable portfolio.

A. Restructuring your Debt(s)
In all likelihood, you would have taken a loan. It is nowadays quite common for people to borrow a home loan, a personal loan or a vehicle loan. Further, you might also be having some outstanding balances against your credit card.

You are paying interest on all these loans! 

In most cases, the interest rate that you are liable pay on such loans, will be more than what returns you can expect from almost all the fixed-income debt-based investments as Bank Fixed Deposits, Post Office Schemes, Debt Mutual Funds, etc. (Note: The only exception probably is the home loan with income tax deductions. The effective cost on such loan would be probably be lower than the interest earnings from debt-based investments).

Logically, therefore, if you have money it would be most appropriate to first clear all the loan liabilities — except maybe the home loan — and thereafter start your investments.

For example, it makes no sense to earn say 7-9% p.a. interest on Fixed Deposits on one hand, and pay 15-20% p.a. interest on the personal loans.

Certain asset classes e.g. equity and property are likely to give better returns than the interest cost. So you could possibly invest in these, while you are still paying off your loans. However, you must assess the feasibility of this. This is very important because equity investment has certain risk element; and property is a high-value low-liquidity investment. Cost is not the only angle to consider.

In other words, you must first re-assess your loan portfolio and suitably restructure / repay it depending on your expenses / liabilities, before you start your investments. 

To re-iterate, you should not invest when the earnings are lower than the cost you are paying on the loans.

financial-foundation
Without solid foundation your wealth would always be on shaky grounds.

B. Planning for Emergencies
Also, before you begin investing, you need to be adequately protected against emergencies that can cause immense financial damage.

Accordingly, it is vital that you should
a. Keep certain amount that is readily accessible such as Savings Account, Bank Fixed Deposit or Short-term Debt Mutual Fund. Breaking your investments prematurely is sometimes prohibited. And even if permitted, it may take time. Plus, you may have to pay a penalty too for doing so. Emergency Corpus ensures that you have quick and easy access to money, and at nil / minimum cost.

b. Both you and your family should be insured against various illnesses and ailments. Therefore, you must have adequate health insurance cover to take care any medical emergencies. As you are aware, medical treatment is quite expensive nowadays. As such, even one illness in the family can wipe out the entire savings.

c. Life and Accident insurance covers for the earning members too are critical, to guard against any such unfortunate eventualities. Death or disability can cause serious financial setback to the family and its finances.

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

C. Preparing your Budget
There is no doubt about the importance of a budget. You just can't plan your investments, if you are not in control of your cash inflows and cash outflows.

Having said that, there are two ways you can go about allocating money for building your investment portfolio. 

The easier and the more prevalent way is to list down all your incomes and expenses. The net amount remaining — if any — becomes the surplus available for investment. However, this formula has a serious drawback. It doesn't force us to prioritize our expenses; cut down on wasteful expenditure; and / or motivate us to earn more. More importantly, this surplus may not be sufficient to comfortably meet our goals.

The better way is to first earmark a part of your income say 10-15% for investments. And, then manage the expenses within the remaining 85-90% of the income. This kind of financial discipline is vital when it comes to creating a meaningful portfolio. Plus, you develop a goal-oriented approach, which is a must for financial success.

Once you have laid the proper foundation, your investments will turn out to be prudent and profitable.

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