Recently, a friend of mine said, "I should probably go beyond merely saving". Now he is a person who hasn't really invested anywhere except for keeping money in the bank.
If you have been saying this a lot to yourself thanks to peers or family or changing circumstances in your life, you might be ready for, and need, investing. You should, however, know certain basic facts about yourself and your conditions before you take the leap. Start by asking yourself these questions.
Q1: What are your personal goals and dreams and when do you want to meet them?
Why it matters: Your goals and dreams decide how you should invest your savings. For example, If your goal is to provide a steady income stream for your family 20 years from now then you would be smart to invest in equity mutual funds now.
If you want to acquire a major asset for yourself, such as a car, 3 years from now then your savings are better off in a debt mutual fund.
What will the answer tell you: What kind of instruments you should choose to invest in and how aggressive you need to be in your saving.
What next: If your goal requires significant money but it's a while away, then approach investing with a long-term perspective where equity mutual funds can help. On the other hand, if your goal is coming up in just a few years, then choose more predictable options such as debt mutual funds.
Q2: Do you have dependents?
Why it matters: Your dependents have the most significant impact on deciding how much you need to save up. Whether you are there or not, their well-being has to be ensured.
What will the answer tell you: How much you need to save for them to ensure they are taken care of even if your income isn't there.
What next: If you have dependents, especially young children make sure to first get a term insurance. The next step is to start working towards a corpus that will generate a sufficient income stream.
Q3: How much do you end up making every year and what portion goes to general living expenses?
Why it matters: Your income decides your expenses and how much you can save if at all. The bigger the positive difference between how much you earn and how much you spend on yourself and your dependents, the more you can possibly save and use towards building a corpus for tough times or when you just want to hang up your shoes and relax.
What will the answer tell you: How much you can save from your income.
What next: Once you know how much you can potentially save based on the difference between your earnings and expenses, the next step is to first start saving and then investing it. Where you want to invest will depend on what you want to achieve. For starters, simply putting that saving in a Fixed Deposit or short term debt fund would be a smart move.
Q4: What is the frequency of your earnings?
Why it matters: Your money will obviously go to finance your expenses first but how frequently you earn from your job impacts how steadily you can finance your savings. So if you are a freelancer or you work for an organization as a regular employee and earn from your projects frequently or somewhat predictably, for example, you tend to get a payment every 15-20 days, you can save more regularly and thus also invest regularly.
What will the answer tell you: What will be your savings and investing frequency and approach. SIP or lump sum.
What next: If you have high frequency but smaller earnings, you will need to invest a small amount every month and thus a systematic investment plan will be better. On the other hand, if your income comes in sizeable but infrequent chunks, go with lump-sum investing.
Q5: What are the costs you incur if you are a freelancer?
Why it matters: This will tell you how much of your earnings you actually manage to retain for saving and investing. Don't forget to add every cost you incur as a price of running your gig, be it taxes such as service tax, the cost of travel, or the sub-contracting you do when you hire others. Also, figure out which business costs will come year after year and which are the ones that are going to be of a one-time nature. For example, in the case of a wedding photographer, the cost of the camera might be one time (lenses are another matter!) but traveling to various locations will be a recurring cost.
What will the answer tell you: How much you will have to save and invest.
What next: Once you know the cost of running your business, as well as how much you need for your personal expenses start guiding your savings into a backup fund that first take care of your personal expenses for 3-6 months and then once that is ready create one that takes care of your professional expenses for the same period.
Q6: How much time does your job or your freelance project leave you with?
Why it matters: The amount of time available to you after your work can influence what kind of investment services you should choose. The more time you are left with the more you can possibly dedicate to managing your investments and learning about investing.
What will the answer tell you: To what extent can you manage your investments on your own and what kind of service you will need.
What next: If your day job or freelance gigs leave you with little time for investing, services that automate investing, such as Scripbox, make a lot of sense and something you can consider. On the other hand, if you have more time and would like to be more hands-on and can learn the ins and outs of investing, use a service that allows you to pick and choose.