Indicators that show you need to start investing
Most people don’t think about when to start investing in the initial stages of their career. In fact, investing and saving for future is hardly a priority at that point. But the reality is that in investing, there is nothing like too soon. You can begin your investment journey with a very little amount as well. In fact, starting early gives your money more time to grow.
To begin with investing, there is no better time than present! Here are few simple reasons for you to start taking charge of your finances; it can help you to know why to start investing. To give you an indication to start investing we list out some factors.
Make up your mind to save as soon as you start earning!
The perfect time to start investing is when you are young, healthy and independent. Here is why it makes sense to start investing early; here are key reasons how and when to start investing for future that can work wonders for you.
- Long-term compounding
Power of compounding can do magic if you keep you invest for the long haul.
Let’s take two different scenarios to understand this.
✓ Scenario 1: Suman started an investment of Rs 5,000 per month at the age of 25. By the age of 60, his investment of Rs 21 lakh would fetch around Rs 1.9 crore, assuming the rate of return as 10% per annum.
✓ Scenario 2: Rahul started an investment of Rs 10,000 per month at the age of 35. By 60, his total investment of Rs 30 lakh can only fetch around Rs. 1.3 crore, assuming the rate of return as 10% per annum.
Retirement corpus is lesser in the second scenario even if the invested amount is more! That’s just because investment was started ten years later. Such is the effect of time and compounding!
Tips: Start investing in systematic investment plan from your very first salary
Clarity on future goals indicates there is a need to invest
Formulate an investment strategy once you have recognised your financial goals. For example, you may want to set aside money for your marriage, which is 12 months down the line. Now that the end target is precise, you can start to fine tune the investments to reach that goal. You can similarly create long-term goals and invest accordingly. A well-calibrated investment strategy will help you realise your goal in the long term.
There are some strong indicators that tell you to start investing. They are:
1. You have your financial goals penned down. This is the first step of financial planning. This is because you know how much money you need and when. It also means that you are “investment ready”.
2. You have paid off your outstanding loans and still have some cash in hand. This will help you build your investment kitty.
3. When investments aren’t meant to merely save taxes.
Here are a few investment strategies for beginners:
✓ Start today! There is nothing called the right time. The sooner you start, the better for you. Waiting for the better job and better salary will only make you miss the opportunity.
✓ Take help of advisors. You can make a better choice with their help.
✓ Know the products that you are investing in. Understanding the product helps you make an informed decision.
✓ Start with simple options in the beginning. Start by investing in options like mutual funds and then proceed to other asset classes like equity.
✓ Monitor and review your investments.
✓ Increase investment amount with time.
✓ Create emergency fund. Try to keep at least six months’ worth salary in this fund.
Conclusion
Starting early is the key to success. So, take charge of your financial future and get started as soon as possible. Keep reviewing your investments regularly and track their growth. This will help you reach your goals successfully.
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Budgeting is different from financial planning
What if I say that trees and leaves are the same thing? You would argue, and rightly so, that they are not. The leaves are a part of the tree but they are different.The same difference holds true for financial planning and budgeting. A lot of people may think they are interchangeable but that is not the case. Budgeting is an exceptionally critical component of a financial strategy. It assesses how much you earn, evaluates how much you consume, and assists you in spending lesser than your income. On the other hand, financial planning, considers your existing financial condition and creates an extensive portfolio by forecasting prospective incomes, asset values and withdrawal plans based on your available financial data.To understand what is budget, it is important to run the rule over financial planning and budgeting first and then find out how they differ. Here we understand the difference between a budget and a financial plan.What is financial planning?Financial planning prepares your financial future, helps you meet your life goals, and gives you financial independence. Effective financial management includes all aspects of your money, including your income, expenditure, investments, and taxes. What is budgeting in business?Budgeting tells you how much you can spend basic your monthly income. For an average household, a monthly budget consists of the expenses incurred on grocery, children’s education, utilities, lifestyle expenses, etc. What is the difference between a budget and a financial plan? Scope Financial planning is a broad concept. Identifying your goals, saving your income and investing are a part of this. Budgeting is one part of the whole financial planning process. It represents a single step just like leaves represent one part of the tree. What they represent Financial planning is based on your financial goals and helps you in achieving them. Budgeting, on the other hand, gives you an idea of your spending pattern and helps you in identifying unnecessary expenses. Horizon A financial plan is devised to take care of your future needs. Budgeting, however, is a short-term concept. It is, generally, done on a monthly or an annual basis. Use Financial planning determines the quantum of your investments. A budget is done to curb possible overspending. This is one reason why budgeting is part of a financial plan. Otherwise, you may never be able to save enough to fulfil goals. To sum up Though budgeting and financial planning seem similar, they are very different. Despite being different from each other, budgeting and financial planning are complementary to each other. Budgeting helps you save while financial planning uses the saved amount to invest in order to help you meet your financial goals.
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Investment Jargons to know
Before you start investing, it’s crucial to understand a few basic financial terms. Every investment comes with its own set of investment jargon that could sound highly intricate and intimidating. Not knowing basic investment terms may push you off investing. In fact, understanding key terminologies helps you make an informed decision. Knowing about some basic financial terms and definitions can be helpful before you take the plunge in stocks, bonds and mutual funds. This is why it is crucial to know how available investments can help you make smart decisions for your investment portfolio. Here we look at decoding the financial jargon that would be useful to you.✓ Compounding✓ Volatility✓ Inflation✓ Market capitalization✓ Price earnings ratio✓ Systematic investment plan✓ Capital gains✓ Liquidity The simpler terms✓ Asset classAsset class refers to group of securities or financial instruments that show similar characteristics and behaviour. Asset classes are classified as equity, debt, cash equivalents, real estate and commodities. ✓ Risk profileRisk profile indicates your risk appetite. In other words, it suggests how much risk you can take when it comes to investing. ✓ Investment portfolioInvestment portfolio refers to your collection of investments. ✓ Investment strategyInvestment strategy refers to planning an investment and taking investment decisions based on goals, risk level and future need of money. ✓ DiversificationDiversification refers to investing in wide variety of asset classes in order to management the overall risk. The complex terms✓ Asset allocationAsset allocation is a process of spreading your money across different asset classes. The entire objective is to reduce the overall risk of the portfolio while maximising returns. There is no guarantee but asset allocation can help you absorb market volatility because your investments are diversified across various sectors of the economy. For instance, if your gold investment doesn’t fare particularly well, you can rely on your equity investment to protect you. ✓ Cash flow analysisOnce the cash flow is determined, it becomes easier for you to plan your investments accordingly. ✓ NAV Net Asset Value (NAV) is the market value of each mutual fund unit. The NAV also determines the total fund value.NAV = (Sum of Market Value of all shares (Including Cash) – Outstanding Liabilities)/ Total number of units outstanding in the market. ✓ Post-tax yieldThe actual return of any investment needs to be weighed on a post-tax basis and not in isolation. This is because the tax implications of any investment might show a completely different result than otherwise. Hence, the post-tax yield is what matters the most as that is what affects the customers directly. ✓ BetaBeta is the risk associated with any investment. It is measured as the standard deviation of the return from the mean return, i.e. the volatility of the investment can be ascertained through the beta of the fund. So, while opting for investments, the beta needs to be kept in mind along with post-tax yield so that the overall risk of the portfolio doesn’t rise too much. ConclusionUnderstanding the fundamentals of basic investment terms definitions and getting it are the key to successful investing. It’s important to be well aware of products and market where your hard earned money is getting invested. Knowing the basic investment jargons can help you make prudent choices.
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