5 factors to think about before you start investing

by Manshu on February 16, 2010

in Investing for Beginners,Opinion,Personal Finance

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I got a few interesting questions in comments and emails while I was away, and now that I am back, I will try and address at least some of them.

One of the more interesting emails I got was to do a write-up about investments for beginners. As I thought about this question — my mind kept wandering to a situation where someone had just started earning, and although I realize a write-up about investment for beginners doesn’t necessarily imply that the person just started to earn, — in this post — I am penning down some thoughts on how people who just got a job and started earning should approach investments.

Before I begin, I should warn you that post this is solely based on my personal experience, and the lessons I learned from my mistakes and is not expert advice.

1. Pay down your education loan: Before you think about investments or building assets, – you need to think about your liabilities and how you will deal with them. I had a student loan when I graduated, and I paid as much as I could every month to get rid of the loan as quickly as possible. I think this worked out really well for me; not only financially but in terms of discipline as well. I got into the habit of putting aside some money every month, and when the loan eventually got over, – I found that it was easy enough to put aside the same money as savings. The discipline helped me build savings once I got out of the debt.

2. Don’t get into credit card debt: The only thing greater than paying down existing debt is to not get into a new one, and especially credit card debt. That to me, is the worst kind of debt. It is almost always spent on stuff you could live without, and the high interest rate means it adds up pretty quickly. I actually got into quite a bit of credit card debt early on. I got lulled into thinking that I can manage a certain number on my credit card bill, and that number just kept increasing every month. Finally the outstanding balance became quite big, and I realized my folly. I paid off the debt in a few months, and have learned my lesson since then.

If you are paying an insane amount of interest for the new jeans you just bought, – there won’t be much left for you to invest. Stay away from it.

3. Risk: One of my finance professors used to say that she had students come to her all the time and talk about returns, but no one spoke about risk. I think this is very important. Thinking about risk, when you first start out to invest is very important. Different people have different tolerance for risk, and different products offer different risk levels. A fixed deposit is usually much safer than an investment in an equity fund. How much money can you lose without losing your sleep? This is an important question, and you should keep asking this to yourself.

4. Invest in tax saving instruments: I bought my first stock in my first year of college, and it was only natural that I continued investing in stocks when I started earning. I think that was a mistake. Early on, I should have invested in mutual funds that are eligible for tax savings instead of buying stocks. After some point in time, – you will reach the upper limit and not be able to save any more tax, but until then invest in stuff that reduces your taxable income and tax liability.

5. Stay away from short term trading: If you are not a professional trader, – stay away from short term trading in the stock market. You will only lose money. If you must trade, then do so with small sums of money that you are comfortable losing.

As you can see only one out of these 5 factors really talk about investing your money. To me, when you start thinking about investing, that’s how it should be, investing is just not buying a certain stock or making a fixed deposit, – a lot of factors influence how you invest and it’s important to think about the big picture and take a holistic view of things before you start thinking about specific investment options.

These are my top picks for factors that will influence investing early on, do you have any to add?

Photo credit: Wonder Webby

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