Planning to make an investment from your salary income is more than just putting money away in some stocks. It involves a lot more. First, you need to consider your existing financial situation and your financial goals. You also need to define the timeline and how much risk you are willing or can afford to take. Read on to know the steps involved in creating an optimal plan to invest from your salary income:
Step 1. Evaluate your existing financial situation.
Defining your existing financial situation requires you to create a budget. A budget will help you evaluate how much money is left with you every month after expenses and emergency savings. This disposable amount will decide how much you can afford to invest reasonably. Some tips to ensure you have a good amount of disposable income to invest:
- Follow the 50-30-20 rule – spend 50% of your salary on needs, and 30% on wants, and save the rest 20% of the total salary.
- If you can reduce or stop spending money on unnecessary expenses like smoking, eating out, unused monthly subscriptions, etc., you’ll have more money to save or invest.
Step 2. Define your short-term as well as long-term goals.
In this step, you need to identify the purpose of investing – your goal. This can be a short-term goal like buying a home in a few years or a long-term goal like retiring comfortably.
Your goals should also have a timeline attached to them. How quickly you want your investments to give you returns? Do you want quick growth or you want to see your investment grow over time?
Your goals broadly fall into these 3 categories:
- Safety – maintaining the current level of wealth
- Income – investing to earn money
- Growth – building wealth over time.
Based on these 3 categories, you can select an investment plan best suited for your needs.
Step 3. Assess your risk tolerance level.
Next, figure out how much risk you can afford or willing to take. If you start young, you are in a better position to take the risk because you have enough time to recover if you incur any losses. If you are older, safe investments are probably right for you, but try to invest more money for better growth.
That said if you are older, and you can afford to take the risk, don’t shy away from making riskier investments that have the potential to give you significant returns.
Step 4. Figure out what you want to invest in.
Your budget, risk tolerance and goals will help you decide the right type of investments. Consider the following investment options:
- Bank savings account
- Chit fund
- Fixed deposits (FDs)
- Public Provident Fund (PPF)
- Mutual funds
- Equity Linked Savings Scheme (ELSS)
- Unit Linked Insurance Plans (ULIPs)
- Direct Equity Investment
- Real estate
Wherever you decide to invest your money, don’t put all of it in the same class of investment. For example, if you put all your money into buying stocks, you risk losing money if the stock market crashes. Diversify your portfolio by allocating your assets to different types and classes of investments that fit your goals and risk tolerance.
When you are at this step, you may get confused about selecting the right investment vehicle for you. Consult a financial advisor who can help you decide the best investment options for you.
Step 5.Track your investments.
Now that you are done with making investments don’t forget to monitor their performance. Every now and then, find out how your investments are doing and whether they are performing as expected. If they aren’t, consider rebalancing your portfolio so that your investments are aligned to your goals.
- If you are a new investor, ask for help from a professional.
- Start investing as early as possible. The sooner you start, the more risk-tolerant you become and the more wealth you accumulate over time.
- Do not put all your money into one investment type. Diversify your portfolio.