4 questions to ask before you start investing

Your first step towards successful investing starts with taking stock of your finances. You should first know your income, expenses, liabilities, and savings. Sure, you may be somewhat aware of these, but that is not enough. You should be absolutely clear about them.

Boosting your savings is a key to having more money to invest. That is why you should closely examine your expenses, especially discretionary expenses, and figure out how you can cut down on them. Similarly, you should also closely examine your liabilities to figure out the cost involved in servicing them. For example, if you have a huge credit card bill outstanding, you should first clear that off. It doesn't make sense to pay 40 per cent interest on a credit card loan while earning 12 per cent returns on your investments.

Before you start investing, you also need to get some other basics in place. First, make sure you buy a health cover for you and your family. Two, buy a term life insurance cover if you have financial dependents. Three, create a contingency fund that can cover your expenses of at least six months. These steps will ensure that no unforeseen event will derail your investment plan.

Next, try to find out the answers to these questions

1. What are your financial goals?

2. What is your investment horizon?

3. What kind of investments should you make?

4. How much money should you invest?

Don't be evasive while answering these questions. If you don't clearly spell out various goals and how much money you would require, you are unlikely to achieve them. This is because a forgotten goal can have a cascading impact on your investment programme. Similarly, it is also very crucial to get the investment horizon and instruments right.

Here is an example of how to do it:

Goal: Rs 5 lakh for a foreign holiday

Time: Five to seven years

Instrument: Equity

How much can you invest: Rs 10,000 per month?

Quickly open an Excel sheet and use the Future Value (FV) formula to find out whether you would be able to achieve the goal. Or simply, you can use our 'Savings Calculator'. Assuming the investment gives an annual return of 12 per cent per annum, you will create a corpus of Rs 8 lakh in five years. This means the foreign holiday is very much within reach.

Once you have made a list of all your financial goals, apply the above method to figure out an actionable plan to achieve them. Depending on these goals and your finances, some goals may have to be tweaked, postponed, and in extreme cases dropped altogether.