“I have some savings with me, should I start investing?”
“Market is falling, is this the right time to invest?”
Etc….etc….and the list goes on!
So we decided to address the issue in this article : when should you really start investing?
See, one rule of investing goes clear – you should first ensure your basic personal finance decisions are sorted. It comprises of mainly 3 broad steps, after which you can look at investing as a 4th step.
Let’s discuss these 3 steps one by one:
Rule 101 of personal finance – go get term insurance!
Death is an uncertain event on which no one has any control. It does not give you any prior warnings or signals, it just happens! In such an unfortunate event, your family should have financial assistance to live a livelihood. That’s why buying life insurance becomes very important. However, it’s sad, as still most of the Indians do not realize the importance of life insurance and simply think paying premium as an expense. This needs to be changed!
Second question comes to mind: why only term insurance and not any other policy? See term insurance is the most simplistic and true form of life insurance which guarantees to pay a certain amount of money on the death of the insured person before attaining a certain age. However If the person doesn’t die, no payout will be made.
And as inspired by many investors, you should always keep your personal finance habits simple! There is no need to combine insurance with investments and invest in complex insurance products that promise to pay a certain amount of money. Insurance is simply a protection product rather than an investing product. Don’t get fooled by others and invest in insurance products that guarantee you certain returns.
Another benefit of term insurance is that premiums are quite cheap when you are young.
Therefore if you are in your early 20’s, you can easily get a cover of Rs 1 crore by paying anywhere between Rs 20,000 – Rs 30,000.
Therefore the best time to buy the term insurance was yesterday. And the next best time to buy is ‘NOW!’
Apart from that you also get certain tax benefits and all, but we will not get into that as of now, as the motive is only to get term insurance irrespective of any benefits.
Hey, my life is covered, so why need health insurance then?
Many people misinterpret this and mix both the steps, however this should not be the case.
Life insurance is simply for the uncertain demise of the insured person, but during the time when the person is alive, he might encounter a certain critical illness. Hospitalization treatment and medical expenses can literally drain out his life savings with nothing left to live a standard life. Therefore health insurance is a must. It aims at covering the health related expenses incurred by the insured person against a nominal premium payment.
Some companies do provide a basic health insurance plan for their employees, but do remember employment might be temporary but your health is permanent. Therefore it’s always advisable to have an individual plan too, or at least a top up on the base plan so that you are adequately covered.
How to select a good health insurance plan and related queries is not the scope of this article, but buying health insurance comprises the 2nd step of the right personal finance habit.
My life and health is covered, now can I start investing?
Well not really! Your life and health insurance does not pay you for the expenses that might arise when you want to take a break from your job, meet some unplanned expenses like phone repair or car repair or even break for higher studies for that matter.
You would definitely not want to sell your investments to meet such expenses right?
Therefore have an emergency fund maintained with you which should be equivalent to at least 6 months to 1 year of your expenses.
You can simply keep this amount in a savings fund and need not expect to generate returns out of it.
Some might advise to keep them in liquid funds, but one should also consider that liquid funds are mutual funds whose redemption might take 2-3 days. Therefore it is comparatively less liquid in that sense in comparison to simple bank deposits.
When you have all the above 3 steps figured out, then finally you can move ahead with investing some part of your savings.
Happy investing 🙂