Investing your hard-earned money in products can look daunting. In fact, all investments may go down the drain if you have not thought out the consequences and planned your investments beforehand.
What you need is a well-sketched-out investment plan that considers different factors like the financial situation, financial limitations, goals, timeframes, etc. This helps in making sound financial decisions and even creating a recovery strategy if things do not work out as per the plan.
But how do plan investments? What are some key things that you must do before you invest? Read this detailed article to understand.
Table of Contents
1. Know Your Investment Time Frame
Goals can be short-term, long-term, and midterm. This categorisation is important since it helps you understand how much time you have to save. For example, if you are saving for your two-year-old’s admission to a great school when they are three, this is a short-term goal and you would need to make a short-term investment.
Similarly, if you’re saving for something that must happen in 3 to 5 years, it would be a midterm goal. And long term goals are those that are still five years away or more.
Once you know your goals’ timeframes, you will be able to understand better how much and where you need to invest based on the assured returns. This will also help you stay focused and disciplined with your investments.
2. Know Your Investment Goal
There may be many things you have planned to do in life, for example, buying a house, saving for your child’s top-class education, buying an expensive car, going on a world tour, etc.
Goals can be big or small. The key to ensuring that these goals are achieved is writing down these goals. For example, if you wish to buy a house in your 30s, you should be able to save enough to make the down payment by the time you reach your 30s. This makes the goals look realistic and achievable, and also helps you work out how much you will need to earn and save.
3. Know Your Asset Allocation
Different classes of assets perform well or poorly at different times. For example, the return on gold keeps fluctuating. Similarly, equities that usually deliver high returns crashed during the pandemic.
So, as an investor, you must ensure that your investments are well-cushioned all the time. This can be done by allocating assets to different classes and strengthening your portfolio. As a result, if one asset seems to not be performing well, another asset can cover the loss.
Note: Make sure to allocate your assets based on the risk you’re willing to take and not based on the return that the asset promises at the moment.
4. Know Your Options
There are many investment options in the market. So, based on your risk tolerance, you can invest in products. For example, fixed deposits are safer compared to mutual funds. However, mutual funds provide higher returns. So, the key is to not invest based on the return rate but on the risk that you are willing to take.
Many people withdraw their mutual funds early because the value drops before they reach their investment goals. In such cases, you must remember that the value usually picks up; all you need is to take the risk and stay patient.
So, if you’re not willing to risk and have an immediate goal to complete, it is best to invest in the safest option. Make sure to research the risks and investments of each product before actually investing.
5. Create an Emergency Fund
Life can never be planned; there are always some surprises either good or bad. And these surprises can throw your goals off. To prevent this, create an emergency fund that you can withdraw during the time of need instead. This will ensure that you do not withdraw your investments.
Many people also rely on loans or credit cards in the case of an emergency. Having a backup fund will save you from paying high-interest rates and loan fees. It will ensure that you do not move backwards and your goals and investment plans stay intact.
6. Avoid Bad Debts
Existing loans with heavy interest rates, outstanding bills, and credit card late payment fees are huge obstacles in your investment journey. If you gain some percentage from your investments, you may end up losing this sum paying off debts and late payment fees.
Therefore, it is important to pay off debts as early as possible. If you have multiple loans, you can also consider consolidating them so you can pay back a fixed amount every month.
Before you invest, assess your financial situation and understand where you stand.
Keep these points explained above in mind and make sure to not rush into anything. Do your research, create a backup plan, and seek professional help if necessary.
Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She’s been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo Save, a digital savings account app that offers a 7% interest rate on savings along with benefits such as insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken it upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.