A lot of people these days come up with the question that now that I have saved some money, what should I do now? Where should I start? Is there a particular order I should follow in order to be investing in the right manner?
All these questions can be answered in a single context as they are interrelated. It is obvious of a new investor to ask these questions, be unsure of the process and more importantly, they may take the wrong step. In order to guide you through, here is a simple 3-step process which will ensure you take the right approach towards investing;
STEP 1: SECURE YOUR 6 MONTHS WITH AN EMERGENCY FUND
When you start investing, it is not necessary that the market work in your favor. Since the market works in a cyclic motion and it is imperative of an investor to begin investing in a bear market, there might be few hiccups in the beginning. Hence, before you put your money into investing, set aside an emergency fund which can feed you for at least 6 months. You will be mentally at peace when you know that you have a back-up corpus if things do not work in favor.
Ideally, you must set aside a minimum of 20% of your salary per month in the emergency fund. Hence, if you earn Rs. 40,000 per month, you must save Rs. 8000 per month as a contribution to your emergency fund.
STEP 2: GET YOURSELF INSURED, LIFE AND HEALTH PLAN
The next thing to consider is to get yourself covered with an insurance policy taking care of your health and life. Although this is not an investment this is equally important as the healthcare cost these days are sky-rocketing and can dig a huge hole in your pocket if a situation arises.
Also, since uncertainty is inevitable, you must get a life cover to take care of the unfortunate events of life.
STEP 3: DO LIFE PLANNING AND INVEST ACCORDINGLY
Many people isolate financial planning from life planning which is not the right thing to do. After all, finances are required to take care of the major life events of an individual and family. Make sure you have a life plan and include finances appropriately in it.
Once you have set aside your emergency fund, now is the time you put your money in the most appropriate investment avenues depending upon your long, short and mid-term needs.
Make retirement a priority even if it might seem too far away. You need to take care of yourself and fund your expenses when you are not earning. Hence, you need to plan for it now. As you get older, your salary increases, start increasing your contribution towards investing more.
The next thing to take care of is the tax. Once you have chosen your desired retirement investment plan, next consider the instruments with tax benefits. Invest in plans which have 80C deductions so that you save a considerable amount of your money from being taxed and invest it.
Once you have taken care of these three steps, you are all set to start investing and become a seasoned investor soon. What is really important in investing is to start early irrespective of the amount you begin with.