How do you get started with investing? What do you save for first?
“Dude, I just signed up with Scripbox. What should I save and invest for first?”
A friend of mine asked me this question just after his wedding. Being relatively new to the world of “investing” he didn’t really have a plan in mind and was so far just setting aside some money in a Recurring Deposit, from his salary.
Just as with everything we are doing for the first time, all of us want to make sure we do things in the right sequence (remember the first driving lesson: slowly press the accelerator while releasing the clutch!).
My friend’s question really was whether there is an order which he should follow when it comes to investing. Here’s what I suggested he do.
Step #1. Secure 6 months first.
The future is always uncertain, but having the next six months taken care of is highly reassuring. Being prepared for any short-term hiccups, in our careers and lives, is pretty important.
The first thing that I suggested my friend do, therefore, is set aside a portion of his salary, as much as he can, but at least 20%, for an emergency fund. Since his wife is also working I suggested they pool their savings to reach this goal faster. Scripbox’s Any Time Cash category is designed for this.
Step #2. Get covered
Now that he is married, I suggested that both he and his wife get an adequate life as well as health insurance cover. To be sure, this is not an investment but a purchase.
The health insurance is incredibly important considering he doesn’t have an emergency fund set up yet and a typical emergency that can derail your finances is a health related one. The life insurance is a must have for both of them now to take care of the unexpected.
Scripbox doesn’t do Insurance, but a service such as CoverFox can do a good job of finding you the best option.
Step #3. Set a long-term target and start investing for it
Both my friend and his wife, are excited about their life’s journey and have ideas about what they want to do.
The next suggested step, therefore, once their emergency fund is created, is to start saving for the longer term. I suggested that they set aside 20% of their combined salary. I based it on an analysis we had done. So a corpus that can pay him 2 lakhs per month in 20 years (about Rs. 3.16 crores) hence is the goal that he is going to save for.
He intends to start with tax saving mutual funds due to the dual benefit of investing in a long term asset as well as saving tax.
That’s it. To begin his investing journey these are the only three steps he needs to take. As he gets older and earns more, he can start investing more, but things never get any more complicated. All of us have only 4 kinds of money. .. What’s important is getting started early.
Source – www.scripbox.com