While a home loan is a constructive debt, if you have personal loan, car loans or any other loan on a depreciating asset, its better to make a plan to pay them off as early as possible.
To become rich investing money is what all of us keep looking for in the world of investments. There are ample money making opportunities all around but many investors start investing without any plan. You need to have a proper plan in place to avoid ad-hoc money management activities.
And, such a plan doesn’t necessarily start with investments. Yes, there are quite a few other money related tasks that need to be completed before you start investing.
Doing these five key financial tasks before investing helps keep the investments secure and your goals on track without having to worry about the financial emergencies as you grow in life.
1. Start with a household budget in place
Going down to the last penny is entirely your choice but having a broad picture of your income and expenses is where you can start with. Write down the various sources of income including your spouse’s income and the various expense heads which can be further broken down into monthly and quarterly basis.
Over time, you will be able to identify a pattern in your spending and then try to rationalize the outflows if a possibility occurs. With a household budget in place, you will be able to carve out a savings plan to meet your short-term and long-term financial goals, such as a vacation, a new car or your child’s education. Remember, the golden rule is that from your income you need to save first and then use the balance to meet your household expenditure.
2. Get rid of debt
Your earnings from investments will get nullified to an extent if you are paying interest on your debt. While a home loan is a constructive debt, if you have personal loan, car loans or any other loan on a depreciating asset, its better to make a plan to pay them off as early as possible.
Too much debt may make you fall into a debt trap as well. Having a health credit profile also helps in maintaining a decent credit score over the long term. Ideally, total EMI payments should not exceed 45-50 per cent of your take-home pay.
3. Get adequate protection
Even before you start investing, make sure you have adequate health insurance and life insurance cover. In the absence of health insurance, you may have to sell your investments that have been earmarked for goals. Even no or inadequate life coverage may not only derial the family’s goals but also impact their standard of living.
4. Build an emergency fund
The one thing that can make your investing journey much smoother is to have an emergency fund in place. There could be a negative impact to one’s earning capacity due to a temporary disability or there could be job-loss for a few months. Even a medical emergency may crop up at a time when the claim is taking time for settlement. In such events, one may have to arrange funds from others or take loans to tide over the situation. As the requirement to access emergency funds may arise anytime, park the funds earmarked for emergency needs only in liquid assets that can help you tide over the situation for at least next six months.
5. Do goal-setting exercise
Finally, having all the above things in place, you are ready to start investing. However, one last thing will be to make a plan for life goals. Goal-setting is only a part of the overall financial planning process which entails meeting life’s goals through proper management of finances. Once you have identified the goals and arrived at the estimated cost after factoring in the inflation, start looking for the right investment avenues and schemes based on your asset allocation that can help you meet your life goals.