6 things you should know before you start investing
Investing a part of your paycheque is not the same as saving a part of your salary. When you invest money, it is with the intention to make it grow. Investment is when you get more cash in return than what you originally set aside. However, there are several factors that you should understand before you decide where to put your hard-earned money.
1. Know your goals and dreams
Investing money for the sake of it—or because everyone says it is the wise thing to do—can get a little tiring and stale. But, just pause and imagine yourself achieving all your dreams! Where do you see yourself in five, ten, 15, even 20 years from now--can you still accomplish those goals and maintain your current spending habits?
Those plans of traveling to strange and new places and affording cutting-edge gadgets—are short-term goals. The key to making these dreams come true is to keep sight of them and start planning early. Long-term goals include planning for retirement and setting aside “rainy day,” funds for unexpected expenses.
For example, if you wanted to be in the Olympics some day, you would HAVE to start preparing for it NOW. The gymnasts and weight-lifters start early and stay committed to their goals. It’s the same with investing. You have to be futuristic and trust that your savings now are going to benefit you in the long-run.
Setting goals and working toward them makes the journey of becoming financially secure more rewarding and fulfilling. Just think of yourself a few years from now, sitting on a cushion of funds that you have built for yourself and your family! Pretty picture, right?
2. Save first, spend later
Save at least 10% of your paycheque—that’s what my dad tells me, everyday. It is easier said than done but 10% of the paycheque is a sizeable amount that you can start with. You can always build up on it. But setting achievable investing goals is integral to keep you on the right track. Otherwise, failure to set money aside might make you less committed and investing might seem as an afterthought—as opposed to a natural part of your money management plan.
For a newcomer to the investing game, setting aside a certain amount each month might feel like a huge task. However, like all good things—saving and investing is a habit.
3. Calculate your net worth
Expert investors concentrate on improving their net worth. Net worth is nothing but the total value of all your assets (house, car, jewellery) minus all your debt. This debt includes all the money that you owe—be it in loans to the bank or even to friends and family. Devising a plan and paying off existing debt helps in identifying how much money you do have leftover to invest.
Net worth is a much more real indicator of your financial security as compared to the balance in your savings account. At any point in time, if you know how much your net worth is—you are more likely to be grounded and secure in your future decisions. For example, your savings account might say that you have Rs. 2 lakhs. However, the sum total of what you owe is about Rs. 1.5 lakhs. Then, your net worth is equal to Rs. 50,000.
Once you are constantly aware of your net worth, you can take steps to increasing that number.
4. Invest your savings
The difference between a person who invests versus a person who saves is that the investor can see the savings multiply. Putting money into savings accounts does not yield any impactful returns. In the long run, the value of money saved reduces, because of inflation.
An investor’s options range from fixed deposits to mutual funds to investing in the stock markets. Figure out which investment options suit you in terms of the taxes that you might end up paying. If you invest in the equity market you are more than likely to get higher returns on your savings. With the right kind of research and understanding about the markets, you can invest for both your long-term goals and short-term ones.
5. What is your threshold for risk?
Identifying your willingness and desire to take risks will determine the kinds of assets you invest in. Historically, sectors such as real estate, gold, tech, etcetera have been considered as secure ways to get more returns.
Your threshold for tolerating risk is the amount of money you can afford to lose. Risk appetite defines your style as an investor. Whether you are bullish in your purchases in the stock market or whether you are more bearish when it comes to risking your assets—defines your risk taking abilities.
Risk appetite also depends on what stage of life the person is when she or he begins investing--a 21-year-old can afford to take more risks versus a 45-year-old who might have other commitments that she/he has to think of.
6. Where to invest?
If the stock markets are a suitable investment option for you, then you can explore different companies and keep tabs on their performance and study their past as well. In today’s digital age, you don’t have to rely on your grandfather’s broker who comes home with share certificates. You can explore the stock markets on your own and make decisions for yourself. Studying a company’s model, tracking their records and performance goes a long way in ensuring that you set yourself up for success.
Online trading platforms offer an easy-to-use place where you can track the changes in the markets, get real-time news to stay informed about geopolitical news that impacts the markets and decide when and where to invest.
Investing might seem like a chore from time to time. Wouldn’t it just be easier to live in the moment and spend all (or most) of what you earn? However, the anxiety that is associated with the future can be reduced by being prepared for it!
Just think about the the times when you thought about what you would do when you “grow up”--the hour is now. You have grown up and have to find a way to make yourself and your loved ones financially secure. Investing is just one step towards a more secure future.