Starting your first job is a thrilling milestone, but it also comes with a host of new responsibilities, including managing your finances. One of the smartest moves you can make is to start investing early. When you get your first salary, everyone suggests starting investing but how to build savings habits with investment planning is not guided by anyone.
I had also faced the same problem but with consistent investment as a small portion of my salary, I learnt a few things about investment which I would like to share with you. If you’re new to the world of investing, don’t worry! This guide will help you get started with easy-to-understand steps and tips.
Why Should You Start Investing Early?
Before diving into how to invest, let’s understand why it’s important to start early:
- Compound Interest: Starting early allows your money more time to grow through compound interest, where the interest you earn also earns interest. I have also built my own strategy, maybe not unique but can give a good amount of returns. Click to know the secret.
- Financial Security: Investing helps you build a financial cushion for future needs like buying a home, retirement, or emergencies. You can also retire early and travel the world or can do whatever you want to do without worrying about financial instability.
- Inflation Beater: Investing helps you stay ahead of inflation, ensuring your money retains its purchasing power over time. Investment in Mutual funds, Stock Market, Gold give better returns compared to conventional investment plans like Fixed Deposit, Recurring Deposits.
8 Steps to Build Savings Habit
I have figured out the 8 steps through which can help you in building savings and investment strategy and lead to your financial goals for the future.
Step 1: Set Clear Financial Goals
Before you start investing, it’s crucial to know what you’re investing for. Do you want to save for a down payment on a house, build an emergency fund, or plan for retirement? Setting clear goals will help you choose the right investment options.
Example: If you aim to save ₹10 lakhs for a down payment in 5 years, you can plan your investments accordingly. Considering the interest rate of 15% per annum, You need to invest ₹11,290 per month for 5 years.
Step 2: Understand Your Risk Tolerance
Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. Generally, younger investors can afford to take more risks because they have more time to recover from any losses.
Example: As a fresher, you might be comfortable with high-risk, high-reward investments like stocks, but if you’re risk-averse, you might prefer safer options like bonds.
I would not prefer you to directly invest in Stocks, if you don’t know which stocks to choose and don’t take tips of the stock and invest blindly. Don’t jump to Futures and Options as you can lose a bunch of money in your early phase. You should always focus on learning and slowly increase and invest in stocks.
Step 3: Educate Yourself
Investing can seem overwhelming at first, but plenty of resources can help you understand the basics. Start with books, online courses, and financial blogs. Familiarize yourself with terms like stocks, bonds, mutual funds, and ETFs (Exchange-Traded Funds).
Example: Books like “Rich Dad Poor Dad” by Robert Kiyosaki and “The Intelligent Investor” by Benjamin Graham are great starting points.
Step 4: Start with a Budget
Determine how much you can afford to invest each month without affecting your living expenses. It’s wise to follow the 50/30/20 rule:
- 50% of your income for necessities
- 30% for discretionary expenses
- 20% for savings and investments
Example: If you earn ₹50,000 per month, you could allocate ₹10,000 towards investments.
Later you can shift to the 40-30-30 rule to achieve your financial goals early by increasing investment. Read the 40-30-30 formula to invest.
Step 5: Open an Investment Account
To start investing, you’ll need to open an investment account and a demat account to invest in the stock market. You can choose between a regular brokerage account or a tax-advantaged account like a Public Provident Fund (PPF) or National Pension System (NPS) in India.
Example: Many banks and financial institutions offer easy online account opening services.
Read the list of top 5 stock brokers and their charges
Step 6: Choose Your Investments
Here are some common investment options for beginners:
- Stocks: Buying shares of a company. They offer high returns but come with higher risk.
- Mutual Funds: Pooled funds from many investors to buy a diversified portfolio of stocks and bonds. They are less risky than individual stocks.
- PPF: A long-term, government-backed savings scheme with tax benefits.
- Bonds: Loans you give to companies or governments in exchange for periodic interest payments. They are safer but offer lower returns.
- NPS: To get a lump sum amount at the age of 60. Tier-II gives the opportunity to withdraw any amount any time.
- Post Office Investment Scheme: There are many post office investment plans for women and children. You can explore those. Here is the list of Post Office Savings Scheme
Example: As a beginner, you might start with a diversified mutual fund to spread out risk.
Step 7: Automate Your Investments
Consider setting up automatic transfers from your bank account to your investment account. This ensures you invest regularly without having to think about it, leveraging the power of rupee-cost averaging, where you buy more shares when prices are low and fewer when prices are high.
Example: Set up a monthly auto-transfer of ₹5,000 into a mutual fund SIP (Systematic Investment Plan).
Step 8: Monitor and Rebalance Your Portfolio
Regularly review your investments to ensure they align with your goals. Rebalance your portfolio if necessary to maintain your desired asset allocation.
Example: If your portfolio’s stock allocation has grown beyond your comfort level, you might sell some stocks and buy bonds to rebalance. Selling is also a part of investment where you protect your returns from going down from that level. This way you can save your investment. You can reinvest them as principal on new plans. Before this, you need to figure out expense ratio, brokerage, exit load, and taxes.
Conclusion
Starting your investment journey as a fresher is a smart step towards financial independence. By setting clear goals, understanding your risk tolerance, educating yourself, budgeting, choosing the right investments, and monitoring your portfolio, you can build a strong financial foundation. Remember, there’s no one-size-fits-all approach to investing, so find what works best for you and start building your wealth today!
