So, here we come to the final lesson of the Investing 101 series. We will use this as an opportunity to recap our learnings and to have a map to guide future actions.
For your benefit, here is an infographic that lays out the most important steps as a checklist in your journey to financial success.
You may download it and keep a copy for yourself too.
Your 10 point money and investing checklist for a stress-free financial life
Let’s understand how you can work on each of the points in the checklist.
- Understand the basics of money – These are some ground rules which will enable you to understand the landscape of money and investments. Basics of inflation, interest, compounding are important to be successful as an investor. By being aware of these basics, you can take much better decisions with your money and investments.
- Prepare a Cash Flow – Know what you are saving – Prepare a Cash Flow where you will list down your incomes and expenses and the difference between the two. Ensure that you are saving enough money regularly. The rule is that you should save first and then spend from what is left. But we will let you decide, which approach works for you.
- Take stock of your current investments and insurance
- Know where your current investments are. Make a note of all your current investments including your Provident Fund, PPF, Bank FDs, etc.
- Similarly, list all the insurance (life, health, accident) policies that you have. The intention is to find out how much cover do you have for life and health.
- Ensure that you are adequately covered / insured for Life and Health– Both are very important and should have the first call on your money. Sometimes insurance is treated as an avoidable expense, but the fact is, it is not. For life insurance, there are multiple approaches as covered in an earlier lesson, that can be followed to figure out the cover that you should buy. As for health, having a personal cover is important. At least a Rs. 5 lac family floater medical insurance is ideal to begin with.
- Set up an Emergency Fund – You never know when emergency strikes and for that reason alone you need to keep aside money. The thumb rule is that you should have an emergency fund which is equal to minimum 6 months of your expenses and EMIs but you can choose a higher number too. This fund should be available to you at short notice.
- List your goals – No one can stop a person who knows what she wants. Clarity of mind and purpose has an amazing effect. It focuses our efforts towards the purpose and provides us a touchstone on which every single act can be validated. Don’t underestimate the power of goals. They can transform you. Make your goals as specific as possible. Give names to your goals as also the time frame and the amount of money that you will need. When it comes to money, you can broadly divide your goals into 3 zones.
- Short term – whatever will need your money within 3 years. For example, to buy a car or going on a holiday.
- Medium term – the money that you will need between 3 to 7 years. For example, making a downpayment for your home.
- Long term – all those demands that will come up not before 7 years. For example, your retirement and your child’s education.
- Prepare your Asset Allocation – Now you are ready to take up the next important step in your checklist – Asset Allocation.
- Money needed in the short term should be invested in no or very low risk instruments like your bank fixed deposits or debt mutual funds or short term bonds. Safety of money is a key principle here to decide which instruments.
- The money that can be placed for the medium term can be invested in low to medium risk instruments. Balanced funds can be a great choice.
- All the funds that you can set aside for the long term that is over 5 or 7 years can be invested in medium to high risk investments. Equity Funds fit the bill here.
- Plan your taxes and invest in line with your goals and asset allocation – Taxes are probably the first thing that hits a salaried individual and it is also the one that is most messed up. In the race to save taxes at the last moment, haphazard investments are made. In some cases, one just lets the taxes to eat up the income. Well, as you learnt earlier in the course, you can make smart investment decisions which can also help you save taxes. For example, you can use section 80C eligible items to fulfil a lot of this checklist’s requirements.
- Understand and Improve your Credit History and Score – Credit plays an important role in anyone’s life. You need credit to buy a home or a car or even sometimes for business purposes. The credit providers like banks or other finance companies give a lot of weightage to your credit history and credit scores. The better is it, better your chances to receive loans at favourable terms and rates. But then credit related mistakes are all too common. Unnecessary use of credit cards, revolving of credit at high rates not only add to the liabilities but also damage your credit profile reflected in your credit reports and scores. You should also ensure that you continue to have a favourable credit score. As per CIBIL, that score should be 750 or more.
- Regular Reviews – A regular review of the cash flows, goals, asset allocation and credit will ensure that you stay on track to meet your goals in a time bound manner. A review will highlight any areas of improvement that need to be worked on. You may need to weed out underperforming investments, rebalance your portfolio as per your asset allocation or add to your insurance cover as the family grows in size. It would be helpful to seek expert professional advice in some cases.
So, that’s about it. This is a comprehensive checklist that you can follow to ensure that you not only avoid money related mistakes but also that you smoothly tread the path of financial freedom.
All the best!
This note is a part of a free course – Investing 101. Want to subscribe to the full course on email?