How do I invest?

Your first step towards successful investmenting starts with taking stock of your finances. You should first know your income, expenses, liabilities, savings. Sure, you know all these things somewhat, but that is not enough. You should be absolutely clear about these things.

Boosting your savings is key to creating more money to invest. That is why you should closely examine your expenses, especially discretionary expenses, and figure out how you can cut down on them. Similarly, you should also closely examine your liabilities to figure out the cost involved in servicing them. For example, if you have a huge credit card outstanding, you should first clear that off. This is because it doesn't make sense to pay 40 per cent interest on a credit card loan and earning 12 per cent returns on your investments.

First, buy a health cover for you and family. Two, buy a term life insurance cover if you have financial dependants. Three, create a contingency fund that will cover your expenses of at least six months. These steps will ensure that no unforeseen events will derail your investment plans.

Next, try to find out answers to these questions.

  1. What are your financial goals?
  2. What is your investment horizon?
  3. What kind of investments should you make?
  4. How much money should you invest?

Don't try to be evasive while answering these questions. If you don't clearly spell out various goals and how much money you would require, you are unlikely to achieve them. This is because a forgotten goal can have a cascading impact on your other investment programme. Similarly, it is also very crucial to get the investment horizon and instruments right.

Here is an example of how to do it:

Goal: Rs. 5 lakh for a foreign holiday

Time: Five to seven years

Instrument: Equity

How much can you invest: Rs. 10,000 per month?

Quickly open the excel sheet and use the FV or Future Value formula to find out whether you would be able to be achieve the goal. Well, if the investment gives an annual return of 12 per cent per annum, the you would be able to create a corpus of Rs. 8 lakh in five years.