A young reader asks, “The investment journeys published at freefincal have inspired me to get started with my investments. However, I am confused about where and how to begin. Can you please write about this?”
The end of the year is perhaps the perfect time to get started on money management, especially if you have a few days off. Personal finance can look simple and elegant if we always remember the first and most important step. Many people struggle because they fail to recognise that this step exists!
When we shop online, do we buy what we need/want, or do we buy what the neighbour wants? That may sound like a silly question, but the answer applies to all things personal finance.
What is my/our immediate need? What is my interim need? What is my long term need? How do we achieve this? What steps must we take to ensure unfortunate events in life do not derail us?
Personal money management is all about finding answers to these questions and appropriate actions. Instead of looking inward and understanding what we want, we spend a lot of time and energy finding the “best products” to buy. We immediately start on the right track when we stop making this mistake. Building the confidence to look inward is the key to successful money management.
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The first step a beginner should do is self-evaluation. If we think of our journey as a three-step process, then step I is preparation (self-evaluation); Step II is action, and step III is review.
Beginners must obviously start with step I. Investors with a few years of experience can proceed to step 2 after reviewing step 1. More experienced investors can go to step 3 after completing previous steps.
1 The preparation
- Is my life insured adequately? That is, will my family be able to handle their immediate, short-term and long-term goals in my absence? Step 1: Buy a term life insurance plan. Do not blindly buy a cover for Rs. 1 crore. Take a few minutes to calculate the cover you need. Also see: Re-assemble Step 3: How to buy Term Life Insurance.
- Are I and my family members insured adequately wrt medical expenses independent of my employment? Step 2: Buy a large health insurance cover. For example, a 15-25L floater baser cover for your family (excluding the elderly or those with fragile health – get them a separate cover). See: This free ebook on Health Insurance will help you choose a policy with ease!
- How ready am I to handle emergency expenses? You need more than 6 months or 12 months of expenses. Remember that cashless hospitalisation does not mean cash-free hospitalisation. You still need to pay for ‘non-medical expenses. So take 5% to 10% of your income each month and spread it over an SB account and a liquid fund. Do this until you have at least a year’s expenses built up. Replenish it when redeemed. Also, see: How much should I set aside as an emergency fund?
- Have I listed all my goals: recurring, short-term (less than five years away), intermediate-term (5-10Y away) and long-term (10Y+ away)?
2 Action
This is when you buy life insurance and health insurance, build an emergency fund and create an investment plan. We have a free ebook that guides you through all these step-by-step: Re-assemble Step by step money management basics.
Beginners can also watch this free seminar: Basics of portfolio construction: A guide for beginners.
After you have created an investment plan, and if mutual funds are suitable for such a plan, you can choose from our hand-picked mutual fund list: PlumbLine.
Key to avoiding mistakes: We should not think about investment products before we fortify our lives with insurance (health, life and emergency corpus) and draw up an investment plan for near-term and future-term goals.
3 Review
These maintenance steps will take no more than 30 minutes a year (yes, a year). We recommend that beginners consider these advanced steps only after the first two steps are complete.
- Do I know the net return (XIRR) of my debt and equity investments? Do I know the net XIRR of the portfolio? Is this above or below the expected portfolio return used in the goal planners?
- Do I know what the current actual value of my goal portfolios is? Do I know how much are they worth? If I don’t invest anymore for these goals, how much would the current value grow when I need the money?
- Do I know how many years I can survive on an inflation-indexed monthly income with my retirement corpus If I retire today? Let us call these X years.
- Am I increasing X by at least one year for each year I work? This is the true measure of a retirement portfolio.
Here are two resources that will help you answer the above questions:
We again urge readers to use this holiday season to start money management by asking the right questions.
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Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
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- Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras.
- He has over 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
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This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
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