As a complete beginner how do I get started with money management?

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.

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

1. 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.
2. 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!
3. 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?
4. 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.

1. 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?
2. 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?
3. 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.
4. 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:

• How to track financial goals?
• Review Your Financial Freedom Portfolio in Seven Easy Steps

We again urge readers to use this holiday season to start money management by asking the right questions.