A lot of people are interested in ‘Investments’ to create assets. An often asked question is how to begin investing. In this short article, we look at a sequence of steps in this process, with an easy to remember acronym – BASICS – Budgeting, Annual Cash Flow, Saving for Emergency, Insurance, Corpus calculation, and Start & Stay the course.
Asan Ideas For Wealth is a well-administered closed Facebook group that is focused on personal finance. A lot of people ask questions about where they should invest. The admin, Ashal Jauhari, typically responds by asking if the basics are in place. The basic steps are listed in the pinned post of the group. The group is also famous for many acronyms – the most famous one is covered in the freefincal article here. (A longer list is here.) In keeping with the tradition of the group, I put together the acronym BASICS that can be used to list the initial steps in investing or financial planning.
B – Budgeting
Typically, budget refers to a future estimate of expenses and income. One formal definition from Wordnik is: “A systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period.” A good first step in your investment plan is to get an estimate of your income and expenses. And the requirement for that is to actually look at what you have done in the past, or doing now. Take the time – it is not a lot – to list out the major expenses you incur every month.
A – Annual Cash Flow
Like a business, an individual too needs to have a clear idea of the overall cash flow. A lot of this is covered in the previous step. For most individuals, there are expenses that occur infrequently, even once a year. There could be some income streams too that are annual. The second step in the investment journey is to have a clear idea of your cash inflow for the year, and the cash outflow for the year. Inflow – expense outflow gives you the surplus for investing. (Once we are done with all the steps, you would change the equation.)
S – Savings for Emergency
An emergency corpus is very important in personal finance. There could be many situations that disrupt your income briefly. You should be able to manage the expenses during this period without touching your investment corpus. You can do this by building an emergency corpus. The typical guideline is to set aside a sum that can over 6-12 months of regular expenses. This should be in a reasonably liquid asset like bank deposit, liquid fund, etc. (Quantum AMC uses the phrase ‘Sacred Money’ for emergency corpus – basically suggesting that you should treat it with a lot of respect and reverence.) A young earner may not have an emergency corpus to begin with and creating one should be the third step.
I – Insurance
Multiple risks are present in the life of an individual. Insurance is a way to mitigate the risks. An individual would require multiple type of insurances – life insurance, accident cover, health insurance, vehicle insurance, etc. Buying the adequate insurance cover is the fourth step of the process.
C – Corpus estimates for all goals
I would admit that this is actually a large, long step. In this step, the individual needs to clearly list down their financial desires which lead to financial requirements. Some examples are – Specific car in some time, Home purchase, Marriage, Repayment of loans, and so on. These requirements should be turned into specific goals that include all these parameters – purpose of the corpus, amount required, time when it is required. Some examples are:
–3 lakhs by end of 2021 for trip to Bali
–10 lakhs by end of 2023 for downpayment for home
–‘Enough’ money to fund child’s education in a private engineering college
– Become a millionaire by 30, and spend the rest of the life in beaches
and so on. The required corpus and the timeframe then become the critical inputs to the full financial plan.
S – Start Investing and Stay the course
Actually, after listing the goals, you need to create a comprehensive financial plan. You can do this yourself, with help from unbiased resources. (An excellent collection is the list of Freefincal ebooks.) You can also consult with a professional planner to help you. This would be for a fee. With the plan in hand, you are finally ready to start investing. And once you start, stay focused and keep to your plan. This step is of course a long one – as long as the time horizon of your plan. It is essential that you stay with the plan. You can, and should, review the progress and make necessary revisions in the plan.
And that is the BASICS for you.
You may be tempted to jump into investing rightaway. This is better than not investing at all. But investing has to be with a purpose and should be guided by a plan. The plan has to take care of the constraints (your income and expenses), address temporary glitches (emergency corpus) and cover the major risks (insurance). This is where the BASICS approach is helpful.