You’ve probably heard it a million times: “You should invest” or “Save your money.” But no one really tells you where to invest or how to start, right? It can be confusing and a bit overwhelming. Don’t worry, though – I’m here to guide you through it all in simple, easy-to-understand terms.
I also faced the same issue and it took me more than 3 years to manage the finances and figure out how and when to invest. All my experience, I have summarized here and tell you how the savings can be bifurcated and invested.
Where to Start: Saving or Investing?
First things first: Age matters a little. But, it’s good you start early and when you are not married as the liability is very less and you can plan your future accordingly. At an early age, you can invest for a longer period compared to people who start investing in their 30s.
Read to know how to invest your lumpsum amount
So, let’s discuss, What’s the difference between saving and investing?
Saving is putting your money aside, typically in a safe place like a savings account, where it grows slowly but surely over time. And, you also know savings accounts yield 3-3.5% of interest on your money parked in the bank account, that does not beat inflation of 6%.
Investing involves putting your money into something that has the potential to grow faster, like stocks, mutual funds, or real estate, but it comes with more risk. By investing in these, you can earn good returns beating the rate of rising inflation.
But, there are steps to follow before diving into the investment in stocks, or mutual funds. There is a step by step process I have outlined that you can follow safely to achieve the financial goals.
Step 1: Build an Emergency Fund
Before you start thinking about investing, it’s crucial to have an emergency fund. This is money set aside for unexpected expenses, like car repairs or medical bills. Aim to save at least 3 to 6 months’ worth of living expenses. Keep this money in a high-interest savings account where it’s safe and accessible.
Example: If your monthly salary in hand is ₹50,000, try to save between ₹2,00,000 to ₹3,00,000 in your emergency fund. You can park this fund in Fixed deposit or can achieve it by doing recurring deposits in your RD account.
Now, you must be thinking. There are so many expenses in day-to-day life. How will you save this much amount?
It’s a habit which you have to build. That’s why I told you to start early as a bachelor. You will be having less liability and can save more. Even if you are unable to save 6 months salary, at least save 3 months salary and park in 3 FDs instead of single FD.
Step 2: Pay Off High-Interest Debt
It is always recommended not to delay in paying your credit card bill or take unnecessary loans and live on EMIs.
If you have high-interest debt, like credit card debt, it’s usually a good idea to pay that off before you start investing. The reason is simple: the interest you’re paying on your debt is likely higher than the returns you’d earn from investments.
Example: If you’re paying 18% interest on a credit card, paying that off is like getting a guaranteed 18% return on your money!
Why should you not take out a loan? After marriage many liabilities will come and you may be required to get a loan for necessary things and at that time, you won’t get any loan.
Step 3: Start Saving for Specific Goals
Now that you have an emergency fund and your high-interest debt is under control, think about your financial goals. Do you want to buy a house, travel, or save for retirement? Different goals might require different saving and investing strategies.
Example: If you want to buy a house in 5 years, you might save in a dedicated savings account or a low-risk investment.
How to split the savings
Alright, let’s talk about investing. There are several options to consider:
I will explain to you the investment plans with an example. Let’s say you save ₹25,000 after removing every type of expenses like rent or EMIs, food bills, shopping etc.
1. The most important step you have to do is start RD if you don’t have a lump sum or make FD if you have a lump sum for emergency funds. You can invest ₹5,000 per month to make emergency funds of ₹200,000 to ₹300,000.
2. Now, you are left with ₹20,000 of savings. Now, you have to take Term Insurance and Health Insurance. If you are of 25 years, you can get term insurance of ₹1 Crore at low cost around ₹1,000 per month, depending upon the tenure of payment you choose.
If your parents have health insurance, you should also buy one of ₹20 or ₹25 Lakhs which you can get around ₹1,500 per month and after marriage, you can add your wife and children too without paying extras.
Read – How much term insurance you should need. And How to decide Right Health Insurance for you and your family.
3. Now, you are left with ₹17,500 of savings. The division of this savings can vary individual to individual and its financial planning and future goals. The most important is your financial knowledge and risk taking capabilities.
I can only advise you how you can divide it among different investment plans.
1. Mutual Funds and ETFs
These are collections of stocks or bonds. Mutual funds and ETFs allow you to invest in a variety of assets, which can spread out your risk. If you have knowledge of mutual funds and ETFs, you can invest around 50% of ₹17,500 in different mutual funds. Mutual funds are also divided into many categories like ELSS, Debt funds, Hybrid, Equity Linked. You can invest as per your risk capacity and future goals.
Read more: List of ETFs and how to invest in them, and How to decide mutual funds.
Example: A Nifty Next50 ETF includes shares of next Nifty50 large companies, so if one company doesn’t do well, it won’t hurt your investment as much.
Read this – Unlock Wealth with My Unique Annual SIP Investment Strategy
2. Small amount in PPF or NPS
How much you want to invest in PPF or NPS, it totally depends on individuals. However, it is necessary to understand the advantages and disadvantages of PPF and NPS.
But, it is firmly recommended to invest in PPF or NPS and save your retirement. You can also explore the options of investing in pension funds offered by many insurance companies. So that your retirement should be secure and safe.
3. Invest small SIP for child future
I would recommend investing a small amount of SIP in mutual funds with a goal to secure your child’s higher education so that you won’t need to take out a loan for it.
4. Investment in Digital Gold or SGB Scheme or Real Estate
If you find any plan where you can invest in Real Estate either residential or commercial with payment in installments, you should go for it.
But, if you are skeptical about Real Estate investment, you go for Sovereign Gold Bond scheme or Digital Gold investment, this also gives better returns and it is safe to invest also.
Investing in property can be a great way to grow your money. You can explore the option of a Real Estate Investment Trust (REIT), where they take your lump sum amount and in return you get monthly rent. There are many sharing property plans from big developer companies like DLF, Embassy group, Mindspace, etc.
But this REIT investment depends on your financial health and if you have an idle lumpsum amount around ₹20 to ₹25 lakhs.
Example: Owning a rental property can provide you with regular income and potential property value increase over time.
5. Invest in Stocks directly
If you have knowledge or want to learn about stock market, you learn and invest directly by opening a Demat account. It is always risky and need proper knowledge before investing. That’s the reason i have mentioned it in the last.
If you are comfortable with stock market, you can start investing it and can lower the investment in mutual funds or ETFs.
You can use my own Financial Planning Calculator (Click here) and plan accordingly if you like it. It’s totally FREE and there is no need to pay hefty amounts to advisors. But, if you like to consult, do consult with a registered financial advisor only.
How to Start Investing
1. Set Clear Goals
Determine what you’re investing for – retirement, a down payment on a house, etc. Your goals will help dictate your investment strategy.
2. Understand Your Risk Tolerance
How much risk can you handle? If the idea of losing money makes you anxious, you might prefer safer investments like bonds. If you’re okay with some ups and downs for the potential of higher returns, stocks might be right for you.
3. Diversify Your Investments
Don’t put all your eggs in one basket. Spread your investments across different asset types to reduce risk.
Example: Instead of investing all your money in tech stocks, consider spreading it across stocks, bonds, and real estate.
4. Start Small and Learn
You don’t need a lot of money to start investing. Begin with a small amount and learn as you go. Many investment platforms allow you to start with as little as ₹5,000.
Pros and Cons of Popular Investment Options
- Stocks
- Pros: High potential returns, easy to buy and sell.
- Cons: High risk, can be volatile.
- Mutual Funds and ETFs or Bonds
- Pros: Diversified, professionally managed.
- Cons: Fees, returns can be lower than individual stocks.
- Real Estate
- Pros: Potential for rental income and property appreciation.
- Cons: Requires significant capital, not easily liquidated.
Conclusion
Investing and saving don’t have to be complicated. Start with an emergency fund, pay off high-interest debt, and then think about your financial goals. From there, explore different investment options and choose what fits your risk tolerance and goals. Remember, it’s okay to start small and learn as you go. Happy investing!
