Steps You Should Take Before Starting Investing

The very fact that you are reading this article shows your seriousness towards securing your financial future. You want to achieve important financial life goals, such as living in a nice home, providing your children with the best education, and finally having a comfortable retirement. Many have achieved these things in their life and you can achieve them too. However, before we proceed to discuss the basics of investing, there three important steps you need to take.

Move on from income mentality to net worth mentality

We are made to believe that income is wealth. For example, if someone is earning a six- or seven-digit salary, he is wealthy. We judge the economic success of someone by looking at how much they earn. There is a correlation between them, though, they need to be separated and considered as distinct economic measures.

Income is what you earn in a given period while net worth is what you save from your income. If you earn Rs. 20 lakh every year and you spend them all, you do not create any wealth. Nevertheless, if you save half of that, it will be creating wealth for you. Your economic success is not only determined by your net income but by how much you keep and save, which goes into creating your net worth. The measure of your wealth is net worth. You calculate net worth by subtracting everything thing that you ‘owe’ by what you ‘own’.

Once in a six month, you should calculate your net worth to know where you stand. Knowing where you stand will be the starting point of your financial freedom.

Pay off your high-interest debts

Debt is something that many of us take to fulfill some of our bigger goals, such as buying a car or home. Few of us can buy a car or a home without taking on debt. We pay interest on these debts along with the principal.

Nonetheless, not all debts are created equally. Some of the loans, such as home loan, might be good for you as interest in them are tax-deductible and are usually have a lower interest rate. There are some loans, such as credit cards, which charges much higher interest. Hence, before you start investing is better to get rid of high interest-bearing loans. This will not only give you peace of mind but also more money to invest.

Create an Emergency Fund 

Financial emergencies have the habit of appearing when you least expect them. Events, such as accidents, natural disasters, illness, job loss, etc., can wreak financial havoc. Hence, it is always advisable to have an emergency fund of 3-6 months your expenditure before you start investing. You should keep your emergency fund in an account that is safe and liquid.

If you know your net worth, have paid you high interest-bearing debt, and have kept aside enough funds to meet any emergencies, you are ready to invest.