1. Financial Foundation before
Investment
- Sudarshan Kadariya (*), NewYork
Do you try to build a house without laying a
foundation? Obviously not! You may not
experience such stupidity in your whole life. With
the similar notion, when you are thinking about
investing your hard earned money aiming to grow
and/or make more money, you always have to
think about your financial foundation. Have you
built your financial foundation? How strong is it?
Is it capable of handling financial winds, the
challenging financial weather, or, even, Is it strong
enough to tolerate the financial quakes (financial
crisis)? Like a building a strong house to live
safely, how many of us have a strong financial
foundation to protect us from the unexpected
financial events? Or, how many of us know to
build a strong financial foundation?
We discuss here a simple strategy to develop a
sound financial foundation before you start to
invest. Primarily, to develop a financial foundation,
you have to go through the following four steps:
Protection by Insurance:
First of all, you should have proper protection
against the unforeseen and unsodden events like
disability, long term health problems, or even
unexpected death! If you have financial liabilities,
your family must have to pay back even after your
death. So, it is very important, if you are the only
income generating member in your family, you
have to have a proper protection for yourself and
for your family. You can buy a suitable insurance
policy from the market. If you have proper
insurance coverage, firstly, you will have peace of
mind. Secondly, in a case of unexpected events, the
insurance company will bear your financial
liabilities by paying your family a certain amount
which will keep your family safe from the financial
burden even if in your absence. Third, the proper
protection will give some financial backup to your
children to complete their education, and, finally, it
will help to fulfill other basic financial needs to the
family.
If you would like to know more about available
insurance plan, you can contact local insurance
agents to get to know more about the policies and
premiums. They will not charge you any fees!
Debts/Loans Payment:
Secondly, we have a common practice of getting
quick loans from our relatives and friends and
sometimes formal loans from the financial
institutions – banks, finance companies, and
cooperatives, etc. In some cases,the access of easy
loans could put us in difficult financial situations if
we do not handle them correctly. The single
suggestion would always be to avoid loans and
give extra efforts to make extra income by working
in two jobs or simply develop multiple sources of
your income.
If you have a loan with high-interest rates, the
wisest thing you could do is to pay off the
outstanding balance as quickly as you can.
Otherwise, you compel to pay compound interest if
you failed to act wisely with debts. On the other
hands, if you are taking loans with high-interest
rate for investing, you would probably be in a more
risky situation because you do not know whether
your investment gives you the higher return than
your interest rates. Also, the risk of your
investment could give you further trouble since
Step 1: Protection by Insurance
Step 4: Investment
Step 3: Maintain Emergency
Fund
Step 2: Debts/Loans Payment
2. you must pay them back. Thus, you should always
pay your high-interest loans as early as possible
while you managing your debts.
Maintenance of Emergency Fund:
You may find very little certainty in many things at
your home, at working place, when you are
driving, and obviously when you are investing. All
uncertainties are the risk for you. It is not possible
to predict the success of your business, job, health,
property, etc. So, we have to be prepared for
emergencies all the time.
In our daily life, there are certain thing those are
mandatory to pay periodically like house rent or
mortgage, school fees, electricity and gas, food and
vegetables, sick and medicines, etc. It is advisable
that you should always have to keep aside part of
your savings, called the emergency fund, in the
most liquid form such as cash or cash at the bank.
Nobody is going to give us a surety that we could
make money all 12 months in a year or consecutive
5 years in our career down the line, the job market
is getting complex, and the managements are
getting tougher! Therefore, it is wise to maintain at
least 3 to 6 months of your income for the
emergency purpose. For instance, if you are
making Rs. 15000 per month, you could maintain
Rs. 45000 to Rs 90000 as the emergency fund and
keep in cash or cash at bank.
Investment:
If you have completed the above three steps and
you still have extra money then you could go with
investing. Investment is a sophisticated process
usually go with the long term by its nature but you
could also find some short-term investment
opportunities in the market through the systematic
search. The investment is a sacrifice of your
current purchasing power to grow them for the
future. All investments involve risks i.e. there are
always chances to lose money. To minimize the
risk of losing money, you should know some
expertise in the areas of finance and investment
before investing. You could go with self-study and
practice or take training available in the market and
do the practices. Many things in investing,
particularly, in the stock market, you will learn by
your experience. The movement of the stock
market by its nature is very technical.
In investing, the human psychology influences the
investment decisions constantly at the time of
picking a right stock, in holding period’s decisions,
in determining the timing to sell stocks, and so on.
In each process, the psychological factors, it could
be your own or the collective psychology of the
crowd involved in the market, influence your
investing decisions making. As a result, your
financial position might be affected. The most
common investors’ psychological factors prevail in
the market are the fear and the greed i.e. the fear of
losing money and the greed to make more money.
Therefore, to become a rational investor, you
always have the challenge to balance such
emotions while you are dealing with investing.
Bottom line:
As discussed above, the financial foundation is an
important mechanism to be developed by each
individual. By reading these topics: protection, pay
loans, emergency funds and investing, we could
understand its theme or the meaning in general but
we have to understand the depth and most
importantly, we have to implement them in reality.
Adopting a simple strategy sometimes give us
invaluable peace of mind and future security. With
this article, we encourage all readers to start
drawing a sketch of your financial foundation and
start to keep adding one brick at a time regularly to
build it strong. Ultimately, you will reap the
benefits of the financial freedom.
(*) The author is a Gold medalist in M. Phil in
Management with specialization in Finance in
2012, Tribhuvan University.Now, he is working as
Assistant Manager in a consulting firm in New
York. The opinion presented in the article is
personal. You can reach to the author at
su.kadariya@gmail.com)