You are young, you are free, there’s a party this Friday like every other Friday, and you have no worry. Well, maybe just one teeny-weeny bit of worry at the back of your mind: is it time to start investing?
But, it isn’t that simple! Where is that extra bit of cash to allow you the leeway to indulge in a bit of investing on the side?
How to start investing?
Say you are between the age of 20 and 25 and have got a job that pays relatively well. You are eager to begin investing but have no clue how to go about it. Your first question will be how to start investing?
It is not unnatural to have a relatively low amount of savings early in one’s professional life; that is nothing to despair over. Look at the brighter side: the advantage of being young is you are starting early, and small savings add up to something substantial over the years.
Here are some steps for investing for beginners:
First, make sure you enter the world of Investment confidently; the Indian economy has enough reasons to make you feel so. Consulting firm PwC believes1 that India will be the largest economy in the world, after China, by 2040, fuelled mainly by higher capital investments and better technology.
This means that the Indian equity market will be on a growth trajectory over an extended period – till you are about 43-48 years old, depending on your age now. So, investing in the market keeping a long-term perspective makes sense.
When it comes to investing for beginners, it’s a good idea to create an emergency fund that is equal to the value of six months of expenses; this will serve two purposes:
(a) It provides you with a cushion to tide over emergencies,
(b) you can invest in highly liquid funds that allow you to start small and withdraw the money when you need it.
Try and figure out that from your current earnings – repeat, current earnings – how much you would be able to contribute to the short/middle term and emergency funds, and how much you can contribute towards long-term investment.
Most importantly, choose an amount to invest that you’re comfortable with. One of the main reasons you may be delaying investment would be because you don’t think you have enough money to invest. “Maybe after my next salary hike”, you’ll tell yourself, assuming a higher salary would mean higher savings. But you’ll soon find that the more you earn, the more you spend.
Better option? Invest small. Investing for beginners can start from as little as Rs. 1000 per month. That’s one dinner at a fancy restaurant! In a matter of 4-5 years, that money could grow to a trip to Thailand.
Break down your goals for the next three years (the short term), and for the next ten years (the long-term), to make it easier to start focusing on funding them.
These goals are not career targets, but more practical ones that require finances: for instance, buy a car in two years, get married and honeymoon abroad in the next five, etc., work out the estimates.
- You should avoid going down the equity route for any plan that requires less than five years and invest instead in the long term because equity investments are always more profitable in the long-term
- What anything less than five years needs a fixed income strategy.
While making investments is essential, there are other emergencies you need to plan for. What happens to all the money you’ve saved, if you suddenly need to spend it all on hospital bills, post an unfortunate event? Or spend it on getting your car fixed, after a massive accident? These events can’t be predicted, but they can be planned for. That’s where insurance comes in.
Investing for beginners should start with life and health. Contrary to what you might think, these policies are cheaper, the earlier you buy them. As you get older and unhealthier, your premium will keep increasing.
The Bottom Line:
Start investing NOW!