If you, like me, get utterly flabbergasted when you hear words like stocks, bonds, mutual funds, tax returns, SIPs, then firstly, welcome to the club. And secondly, I suggest it would be wise to just educate yourself ‘financially’ a little bit so that your future self will appreciate the current you.
As a new newbie in this game of investments, I jotted down a few basic things to keep in mind when putting a chunk of my savings for investing (instead of buying the whole of Zara). Read through this simple guideline as a first step towards understanding how to make your money work for you.
- To start with, saving is a prerequisite to investing. Unless you have wealthy, benevolent relatives, living within your means and saving money are prerequisite to building wealth.
- Know the three best wealth building investments. People of all economic means make their money grow in ownership assets – stocks, real estate and small business – where you share in the success and profitability of the asset.
- Think in long term because investments could be volatile. Don’t invest money in high risk investments unless you plan to hold them for a minimum of five years or longer.
- Invest with goal and purpose, for example, child-education, marriage, buying your own house and ultimately, retirement. We also have dreams to fulfill like getting a car, a trip abroad frequently, etc. All these need proper financial planning.
- Diversify, meaning, hold a variety of investments that don’t move in tandem in different market environment.
- Do your homework before you invest. Investing is not a field where acting first and asking questions later works well. Also, never buy an investment based on an advertisement or a salesperson’s solicitation of you.
- Keep an eye on taxes. Take advantage of tax deductible retirement accounts and understand the impact of your tax bracket when putting money outside the tax-sheltered retirement accounts.
- Before you create wealth, you must take make sure to cover the risk of destroying the wealth. For that, you must take term insurance to protect your family and liabilities. Have a decent health insurance plan to protect yourself from major accidents, which is not in your control.
- Try to minimize the fees, wherever possible. The more you pay in commissions and management fees for your investments, the greater the drag on your returns.
- Don’t bail out when things look bleak. The hardest time to hold on to your investments, psychologically, is when they’re down. Even the best investments go through depressed periods, which is the worst time to sell. And don’t sell when there’s a sale on, infact, consider buying more during that time.
- Hire advisers carefully. Before you hire help to manage your money, educate yourself so you can better evaluate the competence of those you may hire.
- Lastly, your personal life and health are the highest-return, low-risk investments. Remember that they are far more important than the size of your financial portfolio.
– Source: My dad and Investing for Dummies Cheat Sheet