Once you get a job or have started to earn money, start investing. The problem with Gen-X (today’s generation) is that they keep pending investing citing many reasons (read excuses). This does not help. By the time they realize that investing for a good future is very important, they are already in their late thirties. Unfortunately they are unable to take advantage of investing early. You can read about the benefits of investing early here and here.
When you are investing, think for the long term and make this a habit. The problem with investors is that they don’t have patience. They want their investments to grow fast, very fast, in fact we have met people asking where to invest so that its “risk free” and doubles their money in “2-3 years”. People who know even little about investing know that this is just not possible.
Remember long term with focused investing will almost always show results. However if you are tempted and put your money in short-term risky investments like equity-derivatives – more often than not, you will lose money. By the time you realize your mistake, you would have already lost a lot of money. Short-term investments are tempting, but they rarely make money. Haven’t you heard – patience is the key to success?
When you start investing a lot of questions will cross your mind – like how much you should put aside, where to invest, and how much risk you can take with your money? Well don’t worry too much about it. Just start investing, with time you will learn a lot and become a good investor. Trust us.
For starters here are some tips of how you should embark your journey of investing:
1) Keep some cash for emergency: It is important to keep some cash in your bank account for any emergency like a medical expenditure, or emergency unplanned purchase. Most people don’t know how much to keep. It is best to keep 6 months of your average monthly income from all sources in your savings account. It is strange that people do not do this and therefore when there is an emergency, they apply for payday loans to get some cash to temporary solve the problem. However fact is payday loans will only worsen the situation and should be avoided as much as possible. If you keep some cash aside, you will never ever have a look for a payday loan in case of an emergency.
2) Risk Tolerance: You must understand how much risk you are willing to take. For example if you are young and have just started your career, you can take much more risk than someone in his/her mid thirties and a family to feed. You are in the best position to understand your risk tolerance. Once you are comfortable and know how much money (percentage of your income) you can take risk with – start investing!
If you are still confused here is a simple rule of thumb: If you are in mid-twenties – set aside 30% of your income for investing purposes, if you are in your mid-thirties you may set aside 20% of your income for investing, so on and so forth.
3) Get a paid financial planner: Now why we are saying *paid* is that you may get many financial advisors/planers who wont charge you a dime to plan your finances, but they will almost certainly calk out a road-map of your finances which will benefit them directly or indirectly. For example they may tell you to invest in a certain product from where they get a huge brokerage etc.
A good financial planner will discuss your financial goals and objectives, how much time you need to achieve those goals, and how much money you can afford to get them. How much money you need for emergencies. How to best distribute your risk in different financial instruments like stocks, bonds, mutual funds, gold etc.
4) Choose your investment instruments carefully: If you have time to research markets, you can invest in stocks directly. However very few people have this capability to derive profits form the stock markets consistently. Therefore it’s advisable that you take the mutual find route and invest regularly irrespective of the stock market condition every month for at least 5-10 years of time frame. Research has shown that people who invest regularly irrespective of the market condition tend to make huge profits from the stock market. However choose your mutual fund very carefully. Choose a mutual fund with a consistent track record of at least 3 years.
5) Invest regularly: As written above you must invest regularly irrespective of where the markets are heading. In the end and after a few years it will be worth it.
6) Rebalance your portfolio regularly: You must have a look at your portfolio every year to see if it’s performing as per your expectations. If not you may need to do some changes. Ask your advisor and do the necessary changes.
If you are disciplined investor and keep investing regularly in the right financial instruments, rest assured you will have enough money by the time you need it.