Lesson 4: Let us begin Investing

It is always a good idea to read all the Investing lessons in order to get the maximum benefit.

Now that we have understood a lot, let us start investing. But wait. There are a few key points to be noted.

1) If suppose, by any chance you are in to credit card debt then stop the idea of investing and go ahead and clear the debt first. (Credit card debt is one where you still have the balance payment on the card that you should have paid a month ago. That means you have paid only the minimum amount and carried forward the rest. To remind you the interest on the credit card debts is in the order of 30-35%. So if are servicing such a loan and trying to invest your money for annual returns of 10-15% it is sheer stupidity.

2) If you have other personal loans that are very high, again stop and try to close them first. Please note that we are not talking of home loans here. but of other personal loans that do not have tax benefit and also have interest rates of 12-20% range. Of course if you do have a home loan and a car loan but still enough money than go to point 3)

3) If suppose you get expelled from your job today, what would you do? The question may seem irrelevant, but you will know its importance soon. What I am trying to tell you is that you should have enough cash in hand (or in savings account of your bank) for emergency situations. It should ideally be capable of handling your family’s 6 months expenses, but it should atleast be enough for 3 months. This emergency cash should NOT be used for ANY OTHER PURPOSE. Not even for helping others in the same situation. In fact you should never feel like having it. (Think that it is not yours till emergency strikes). Believe me, when it comes to money, there may be none left to help you. (You may not be as lucky as I am !?!)

4) Now, you have cleared all your high-interest debts, you have 6 months expense cashed in for emergency and this is the time to start. But remember another golden rule of investment. “Don’t put all your eggs in one basket” – Diversify it. So even if you feel that it is the best option don’t put all your money on just one investment.

First step] Manage your monthly expenditure. By this I mean that you should be in a position to tell that I would need X Rs every month for the expenses. It is difficult to predict the exact amount you would need each month, but with a small buffer you can easily tell the amount. So the first step is to find exactly how much you will spend each month and so how much will be the balance each month that can be used for investing.

Second Step] Whether married or not, the first step must be Life insurance. Time and again we have been cautioned that the LIC agents will do anything in their power to lure you into some stupid scheme. So the best thing is to take a ‘Pure Term Policy’ for the amount you wish to insure. The premium per annum will be very less.  I have taken Anmol Jeevan from LIC for 10 Lakhs and the premium is just 2890 per year. Great isnt it. You can also go to private players. I heard there is a scheme where the premium is very less if you are a non-smoker.

Third Step] Open a PPF account in some nationalized bank. Put the intial amount of 500 Rs atleast and even if you don’t like PPF at all keep the account alive by putting the minimum of 500Rs (max is 70000) every year. For a risk-averse investor PPF is really good. Currently it is the only investment (as far as I know) where the interst also is tax exempt and the principal has tax-benefits.

Fourth Step] The basics are over now. So from now on, where you are going to invest depends on many other factors also like your risk capability, mentality, need, tax planning etc.

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