How do I invest?

Your first step towards successful investment starts with taking stock of your finances. You should first know your income, expenses, liabilities, and savings. Sure, you know all these things vaguely, but that is not enough. You should be absolutely clear about them.

Boosting your savings is a key to create more money to invest. That is why you should closely examine your expenses, especially discretionary expenses, and figure out how you can cut down on them. Similarly, you should also closely examine your liabilities to estimate the cost involved in servicing them. For example, if you have a huge credit card bill outstanding, you should first clear that off. This is because it doesn't make sense to pay 40 per cent interest on a credit card loan and earning 10-12 per cent returns on your investments.

Then there are some basic priorities that must be taken care of before you begin your investing journey. First, buy a health cover for you and your family. Two, buy a term life insurance cover if you have financial dependents. Three, create a contingency fund that will cover your expenses of at least six months. These steps will ensure that no unforeseen events will derail your investment plans.

Next, try to find out answers to these questions:
1. What are your financial goals?
2. What is your investment horizon?
3. What kind of investments should you make?
4. How much money should you invest?

Don't try to be evasive while answering these questions. If you don't clearly spell out various goals and how much money you would require, you are unlikely to achieve them. This is because a forgotten goal can have a cascading impact on your other investment programme. Similarly, it is also very crucial to get the investment horizon and instruments right.

Here is an example of how to do it:

Goal: ₹8 lakh for a foreign holiday

Time: Five to seven years

Instrument: Equity

How much can you invest: ₹10,500 per month?

Quickly open the excel sheet and use the FV or Future Value formula to find out whether you would be able to achieve the goal. Or simply, you can use our 'Savings Calculator'. Assuming the investment gives an annual return of 10 per cent per annum, you would be able to create a corpus of about ₹8 lakh in five years. This means the foreign holiday is very much within the reach.

On similar lines, you can calculate the monthly investment required to accumulate a particular amount in a specified period for your financial goals or figure out how long it would take to amass your desired corpus based on the monthly investment that you can make.

Once you have made a list of all your financial goals, apply the above methods to figure out an actionable plan to achieve them.