We always want to get to the exciting stuff about how we can grow our money and become richer. The important steps to be taken before investing your first penny get overlooked in this excitement. In any case, take these few points with you so that before investing, you learn how to start investing.
TL;DR: Develop an Emergency Fund, get Life Insurance, and choose a Medical Insurance policy before you start thinking about investing to grow your money.
1) How to start Investing to create an Emergency Fund:
Hope for the best. Prepare for the worst.
You start investing. You feel good when you see your net-worth grow to a couple of lakhs in some time.
Shit happens. For example, one can lose their job. Likewise, their spouse can lose their job. One’s sibling might need money. Similarly, you might want to send your parents on a trip. A legal liability can come up. One of hundreds of unpredictable things can happen. Consequently, the corpus goes to zero.
Not a problem, you say. You will start again. But in the process, not only do you lose money directly, you lose out on The Power of Compounding.
If we take a random amount for calculation,
the 2 lakh you had to let go at the age of 30, which you had accumulated after investing for a few years, would have become over Rs.20,00,000/- at the time of your retirement at 60, in a humble FD @ 8%! In 20 years instead of 30, it wouldn’t even have become 10 lakh!
|Amount invested||At Age||Amount you get at 60 years of age|
at 8% Compound Interest
And we are not even getting into high-return instruments right now. Now, if you think you can afford this kind of loss, fantastic. Otherwise, do not skip this step.
So, when you skip setting up an emergency fund, you are not losing just the amount 2 lakh, you are losing a few years of compounding. In the long run, this is a much bigger loss when it comes to growing your money. You can always earn more money to replenish your emergency fund. Unfortunately, us mortals cannot generate more time.
Another reason you need a dedicated emergency fund apart from your investments is that most investments, including FDs and Mutual Funds have exit loads if withdrawn before a certain period.
Avoid losses of time, it is your most valuable asset even when it comes to investing and compounding, and start creating an emergency fund today.
2) Life Insurance:
This one does not benefit you. In other words, you do not earn anything from it. However, it secures your family’s future in case of a mishappening.
The biggest problem – which one should one go for? The answer though, is almost simple when you learn and memorize and repeat one truth. Insurance is not an Investment. Insurance is not an appropriate tax saving tool.
Certainly, insurance is an expense. Thus, we should treat it like one. Above all, remember that you insure to reduce risk. Nothing more, nothing less. You do not insure your vehicle to gain returns. Instead, you pay a premium to reduce the chance of a future, greater payment.
Any amount that you pay to get a return from an insurance policy is stuck there. Consequently, you end up losing a huge opportunity cost. The same money in another instrument will probably earn a higher return.
You do not insure yourself to gain returns. Once you understand this fundamental, you know that there is only one kind of insurance you should go for, i.e., Term Insurance.
3) Medical Insurance:
Going forward with creating an emergency fund, there are some emergencies you can almost foresee and plan for.
Like it or not, eventually someone in the family can face medical expenses. It is anybody’s guess how much that can amount to.
Do not let an illness erode your savings.
Again, this is an insurance, an expense, that will not, and should not grow your money. It is only a guard against a future, much bigger expense. To clarify, though we hope our medical insurance money goes waste, it makes sense to prepare for these expenses.
At a young age, you can rely on the insurance provided by your employer, but read the fine lines of the cover limit, inclusions, exclusions, etc.
That is it. Now you know what you need to do before you start investing for growth, and you are set on the path to invest.
May your money grow faster than the speed of light!
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