Well most young investors become very enthusiastic about stock markets, IPOs, etc. nothing can go right if the basics are not in place. We must understand that wealth creation is a journey and not a destination. But even before starting the journey, there are some of the very important steps we need to take.
Lets take for an instance that i am in my 20s and have begun earning. I am married. My spouse is working as well. My parents are retired and hence living on pension but i want them not to use the pension funds for grocery and stuff – that i would like to take care. Now, since i am earning and young, i have credit cards which i have used and bought the latest iPhone using EMI facility. I also have a personal loan running for 5 year tenure at an interest of 14% p.a. Now i want to begin my wealth creation journey with SIPs and become a crorepati by 45 and retire early. That’s the plan!
STOP! If this is what your situation is like or somewhat resembles your situation, you should not even think of beginning your investment journey. Why you ask?
Herer’s why. Investments grow on compounding and compounding takes years to show its magical effect. But here is the catch. It has to be untouched, uninfluenced or unbothered by you. In other words, your invested corpus shouldn’t be out of the market at any cost (except for may be rebalancing). It will destroy all effects of compounding and your story of wealth creation remains a story you never get to tell!
Before even starting to invest, here are few arrangements, you need to make .
- Emergency Fund
- Closing all your high interest EMIs
- Setting up a Mediclaim
- Having a Term Plan
- Separate bank accounts (optional)
Lets look at them one by one.
Emergency Fund
Having an emergency fund is one of the foundation elements of wealth creation. What is emergency Fund? When sky falls on your head, this is that fund which will give you and your family the bread and butter that you need for 180 days at least (6months). Basically, this fund is created and kept in a bank account or parked in a debt fund, untouched, till them time there is a dire need of money and you don’t have a source of income to get that amount. I normally try to keep my emergency fund for a corpus of 6 months of my fixed expenses. Fixed expenses would include food, medicine required every month, children’s school fees, groceries, EMIs, bills, etc. So take note of the amount that you spend on these fixed expenses every month and set aside a sum of 6 months of fixed expense. You can definitely add a buffer of one or two months. I will write a separate blog on the ideas of emergency fund creation.
Closing all high interest EMIs.
This is important. Usually high interest EMIs are never more than 5 years. These can include Personal Loans, Car Loans, Gold Loans, Credit Card EMIs, etc. If you have a running Home Loan then do not consider it to be a part of high interest loan. I always refer to my monthly expense google sheet/excel sheet to check and see how much EMIs i am paying to the banks. Always close all your high interest EMIs before beginning your investment journey.
Setting up a Mediclaim
A study was done recently which stated that an average Indian middle class family is just one hospitalization away from bankruptcy. Read that again! I consider this shameful and greedy, that i want to start my investment journey and earn crores from the market, but do not have sufficient Mediclaim cover for my family! This is really unfair on my part! Forget about all investments and market and retirement. All will go down the drain if you have a medical issue at home and need 10-15 lacs for the treatment. I am sure, 10-15 lacs isn’t available with young investor in their 20s. So you break all your investment, take loans, sell your house- all because you didn’t set up a Mediclaim for yourself and your family. If you have a corporate Mediclaim, PLEASE DO NOT RELY ONLY ON THAT! Please get at least a 20 lacs cover for your family. This is extremely urgent.
Having a Term Plan
Term Plan is basically a Life Insurance. In case you die before time, you family is insured a corpus post your death. Thus, being the bread earner of the family, you are relieved of the worry, that your family would suffer financially post your demise. Term plan premiums are usually lesser than Mediclaim. Why? Because chances of breaking a leg is higher than chances of death. Hence the Mediclaim premiums are higher as there is higher probability of using them almost every year. Term plan has to be set up, but always set up a Mediclaim first.
Separate Bank Accounts
You can keep separate bank accounts and use them as buckets. This would streamline your finances and make it easier for you to manage them. You need to have three bank accounts : Income bank account, expense bank account and investment bank account. Income bank account is nothing but your salary account where your company credits your monthly salary. The moment you get your salary, transfer your monthly investment amount to your investment account and expenses to your expense bank account. This is a discipline that you create for yourself and at the same time, you do not have the ability to use your investment amount for your expenses. However, i think that this can be optional as there are ways to manage your monthly finances without having separate bank accounts.
These are the foundation blocks of wealth creation. If you are planning to begin your investment journey in 2025, pause and see if the foundation is built properly. Without these pre-requisites, your investments will surely crumble one day.
