Financial foundation before investment
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Step 1: Protect yourself and your family through proper insurance policies that cover disabilities, health issues, and death. Step 2: Pay off any existing high-interest debts and loans as quickly as possible to avoid accumulating more interest. Step 3: Maintain an emergency fund equal to 3-6 months' worth of income in a liquid account to prepare for unexpected expenses. Step 4: Once the above financial foundation steps are in place, any remaining money can be considered for investment with a long-term approach and awareness of investment risks.
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Financial foundation before investment
- 1. Financial Foundation before Investment - Sudarshan Kadariya (*), NewYork Do you try to build a house without laying a foundation? Obviously not! You may not experience such stupidity in your whole life. With the similar notion, when you are thinking about investing your hard earned money aiming to grow and/or make more money, you always have to think about your financial foundation. Have you built your financial foundation? How strong is it? Is it capable of handling financial winds, the challenging financial weather, or, even, Is it strong enough to tolerate the financial quakes (financial crisis)? Like a building a strong house to live safely, how many of us have a strong financial foundation to protect us from the unexpected financial events? Or, how many of us know to build a strong financial foundation? We discuss here a simple strategy to develop a sound financial foundation before you start to invest. Primarily, to develop a financial foundation, you have to go through the following four steps: Protection by Insurance: First of all, you should have proper protection against the unforeseen and unsodden events like disability, long term health problems, or even unexpected death! If you have financial liabilities, your family must have to pay back even after your death. So, it is very important, if you are the only income generating member in your family, you have to have a proper protection for yourself and for your family. You can buy a suitable insurance policy from the market. If you have proper insurance coverage, firstly, you will have peace of mind. Secondly, in a case of unexpected events, the insurance company will bear your financial liabilities by paying your family a certain amount which will keep your family safe from the financial burden even if in your absence. Third, the proper protection will give some financial backup to your children to complete their education, and, finally, it will help to fulfill other basic financial needs to the family. If you would like to know more about available insurance plan, you can contact local insurance agents to get to know more about the policies and premiums. They will not charge you any fees! Debts/Loans Payment: Secondly, we have a common practice of getting quick loans from our relatives and friends and sometimes formal loans from the financial institutions – banks, finance companies, and cooperatives, etc. In some cases,the access of easy loans could put us in difficult financial situations if we do not handle them correctly. The single suggestion would always be to avoid loans and give extra efforts to make extra income by working in two jobs or simply develop multiple sources of your income. If you have a loan with high-interest rates, the wisest thing you could do is to pay off the outstanding balance as quickly as you can. Otherwise, you compel to pay compound interest if you failed to act wisely with debts. On the other hands, if you are taking loans with high-interest rate for investing, you would probably be in a more risky situation because you do not know whether your investment gives you the higher return than your interest rates. Also, the risk of your investment could give you further trouble since Step 1: Protection by Insurance Step 4: Investment Step 3: Maintain Emergency Fund Step 2: Debts/Loans Payment
- 2. you must pay them back. Thus, you should always pay your high-interest loans as early as possible while you managing your debts. Maintenance of Emergency Fund: You may find very little certainty in many things at your home, at working place, when you are driving, and obviously when you are investing. All uncertainties are the risk for you. It is not possible to predict the success of your business, job, health, property, etc. So, we have to be prepared for emergencies all the time. In our daily life, there are certain thing those are mandatory to pay periodically like house rent or mortgage, school fees, electricity and gas, food and vegetables, sick and medicines, etc. It is advisable that you should always have to keep aside part of your savings, called the emergency fund, in the most liquid form such as cash or cash at the bank. Nobody is going to give us a surety that we could make money all 12 months in a year or consecutive 5 years in our career down the line, the job market is getting complex, and the managements are getting tougher! Therefore, it is wise to maintain at least 3 to 6 months of your income for the emergency purpose. For instance, if you are making Rs. 15000 per month, you could maintain Rs. 45000 to Rs 90000 as the emergency fund and keep in cash or cash at bank. Investment: If you have completed the above three steps and you still have extra money then you could go with investing. Investment is a sophisticated process usually go with the long term by its nature but you could also find some short-term investment opportunities in the market through the systematic search. The investment is a sacrifice of your current purchasing power to grow them for the future. All investments involve risks i.e. there are always chances to lose money. To minimize the risk of losing money, you should know some expertise in the areas of finance and investment before investing. You could go with self-study and practice or take training available in the market and do the practices. Many things in investing, particularly, in the stock market, you will learn by your experience. The movement of the stock market by its nature is very technical. In investing, the human psychology influences the investment decisions constantly at the time of picking a right stock, in holding period’s decisions, in determining the timing to sell stocks, and so on. In each process, the psychological factors, it could be your own or the collective psychology of the crowd involved in the market, influence your investing decisions making. As a result, your financial position might be affected. The most common investors’ psychological factors prevail in the market are the fear and the greed i.e. the fear of losing money and the greed to make more money. Therefore, to become a rational investor, you always have the challenge to balance such emotions while you are dealing with investing. Bottom line: As discussed above, the financial foundation is an important mechanism to be developed by each individual. By reading these topics: protection, pay loans, emergency funds and investing, we could understand its theme or the meaning in general but we have to understand the depth and most importantly, we have to implement them in reality. Adopting a simple strategy sometimes give us invaluable peace of mind and future security. With this article, we encourage all readers to start drawing a sketch of your financial foundation and start to keep adding one brick at a time regularly to build it strong. Ultimately, you will reap the benefits of the financial freedom. (*) The author is a Gold medalist in M. Phil in Management with specialization in Finance in 2012, Tribhuvan University.Now, he is working as Assistant Manager in a consulting firm in New York. The opinion presented in the article is personal. You can reach to the author at su.kadariya@gmail.com)