We often live with the misconception that only the rich can get richer. Investment options are looked at skeptically as a gambling game, which cannot be true as returns in investment take long and can be a result of a calculated judgment.
Since you are reading this article, I will safely assume that you are looking to multiply money with existing income. It is easier to allow money to multiply in your sleep than to get an additional job. Investing at an early stage can increase the amount you will end up saving by the time you retire.
If you have an investment plan that you can withdraw at any given time, it could serve well for medical emergencies as well as an impulsive vacation plan. Well, in short, it's not too bad to have a little extra money saved. Here is some general advice on investment for beginners.
From where do I get the money to invest?
Especially in the early stages in your career, one does feel like he or she has no money to spare to invest it. There could be a few things that you might be ignoring when it comes to savings.
1. Your sleeping bank account:
You might have an additional bank account other than your salaried account that you might have opened back in your college years and now sits there with a little more than minimum balance that you might have kept for emergencies or probably because you forgot it existed.
2. Confusing insurance with savings:
It is good to have one life insurance especially if you have dependents, but it is not exactly fruitful to invest more than one. In an emergency, this recurring investment could seem utterly useless especially if you lose your job or fail to pay the premium. All of your investment will be lost.
Investing in a good health insurance and one life insurance is practical. Do not get fooled by insurance schemes sold as investment products.
3. Impulsive spending:
We all know that certain someone who sweeps off his/her bank account within the first week of receiving the salary. These are individuals prone to irrational buying. There is a definite need for self-control and understanding what expense is needed and what is not. It is always advisable to transfer money to various investment options after keeping some aside for necessities like rent, food, etc.
Understanding your investment personality
Before you start investing, you need to understand what kind of investor you want to be. This realization will occur when you have set financial goals. Investors could be categorized as -
Conservative: These are investors that want to take the least risk and are aiming at saving money for their retirement years. They want to put their money in a savings scheme and forget about it. Example: PPF
Aggressive: The ones who try their hand at investment options that could give them short-term gains in a span of like five years. They aim at using the earnings in buying assets like a car or going on a vacation abroad. They spend a moderate amount of time watching their investment and bet on investment with less risk. Example: Mutual funds.
Speculative: These are the ones who watch the market and trends regularly, betting their money on investments that could yield in many folds or vanish entirely. They are usually familiar with the market and its workings.
You should only be willing to put your extra money that you would otherwise be resting in the bank or be spent in some time you would regret. Also, decide your investment plan based on your appetite for risk. Do not invest impulsively while watching the investment sleeplessly, with a fear of losing it.
If you are well in your career and are planning to buy a home, it is advised that your total EMI should not exceed 50% of your take-home pay. This will ensure that you have enough for other goals and do not spend most of your life tied to the home loan payment.
Do not to invest in instruments you do not understand
Let us take cryptocurrencies for example. Bitcoin and others are in the news for rising in value and bringing in a fortune to early investors. Though it might seem tempting, it is not advisable to put away your hard earned money on an unregulated trend, especially if you are a small investor.
Spend some time in understanding various instruments or vehicles of investment. You might have a broker who will advise you into investing in unheard-of schemes, with high risk and high returns. At the end of the day, it is your money; you hold the responsibility of gaining or losing from it.
Also Read: What is Investment Compounding?