How to manage debt, risk, asset allocation before you start investing



Before you even start investing your hard-earned money, here are some key things to consider in order to stay in control of your finances.

Money management starts with household budgeting and goes a long way into putting together a financial plan for your long term goals. Whatever your income, what matters is how much you can save as a percentage of your income. To get started, take a close look at your current financial situation. Before you even start investing a single rupee, have a proper financial plan in place. It gives you better control over your personal finances based on your particular situation. What are your sources of income and where is your money spent – is it more discretionary spending that you can manage better?

Initially, when you start to invest, an important step will be to create an emergency fund. As a rule of thumb, start building a corpus equal to about six months of household spending to meet any financial requirements. Such an emergency fund can be a mixture of bank savings account, short-term funds or cash.

Then take a look at your total debt and if there are any outstanding personal loans or credit cards, plan to prepay or close them as soon as possible. Avoid deferring credit card contributions to save interest charges.

After you’ve created an emergency fund and taken care of your debt, you’ll be in a better position to build wealth for the long haul. Another crucial aspect of personal finance will be to consider the risks – the risks to life and health. Obtain adequate life insurance coverage preferably through a term insurance plan and also purchase health insurance coverage for all family members.

Now comes that part of your personal finances that will help you comfortably achieve your long term goals without having to borrow from lenders or other sources.

Write down the short, medium, and long term goals you need to achieve over the next few years and later after a decade. Use investment calculators to find out how much you need to save after you factor in inflation. And yes, don’t ignore saving for retirement as it will require much less saving than other goals, while still helping you retire comfortably.

Depending on your risk profile and the number of years ahead of your goals, have a diversified portfolio of stocks, debt, and gold. Within debt, you can invest in PPFs and debt funds for medium term goals, while staying in equity funds for goals that are far into the future. Choose to go through the SIP mode of investing in equity funds and keep adding funds as the stock market sees a significant correction or decline. In the long run, markets drift higher and stocks only benefit over longer periods. Continue to review the performance of MF programs and begin the risk reduction process when you are 3 to 5 years away from goals. You are approaching your goals, moving your funds from equities to less volatile debt funds and you are at home!

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