Go one step at a time – control the chaos

When I started out, I used to think I need someone to sit me down, tell me what exactly I need to do, one step at a time. I was lucky enough to have a friend and some people around to guide me.

What confused me was the priority, what should I do first – is it funding the bank account, emergency fund, paying off debt, investments, stock markets, LIC, health cover etc etc.

So I decided to share with you the priority as I have understood it.

Worst case first – Term Insurance

So some real talk now. Worst case is if you die and have dependents who still have to live several years after you.

These dependents can be your parents, your partner, children, sibling etc. Last thing you want is your family to struggle after you are gone.

Till you are alive and able, you will do anything to survive. You know that. And that’s why when-you-die scenario is more important than when-you-live.

So the first thing you do is get a term insurance.

Term insurance can start with monthly payments too, so don’t delay it further till you have more money. It gets costlier as you age. Add all the riders that are important like accident, critical illness, cancer, disability etc.

Entire process gets over in 10-15 days and trust me, you will feel such a relief the day you get your policy in hand. It is almost like a huge boulder is lifted off your shoulders and you can now stand straight!

We don’t realise but for some of us, “what if something happens to me” plays havoc in our minds subconsciously.

The after-death years are covered, now all you have to figure out is the money for this lifetime.

Health Insurance

Health insurance is important to take care of all non-critical illnesses, hospitalization, tests, medicinal expenses etc.

Recently someone in my extended family got knee replacement done. It costed close to Rs 5 Lakh. They got it all done through health insurance.

Health insurance gives you a support at the time when you need money to be the least of your worries.

Emergency Fund

Now that health is taken care of in all it’s extremities, it’s time to plan for contingencies.

I have spoken in detail about this here.

Bank Account

There is an arrangement where you can actually maintain just minimum balance in  your account once you have built your emergency fund.

But since I myself am not yet there, I will share with you what I do currently. ( I am not even halfway through my emergency fund target).

I maintain Rs 40,000 to Rs 50,000 balance in my account for any urgent ticket booking (only to visit parents and in-laws should there be an emergency), minor medical need etc. That’s it. Rest goes into investments.

If you don’t have an emergency fund and prefer holding money in your bank account instead of liquid fund, you clearly are looking at building and maintaining at-least six months of your expenses in bank account at all times.

Debt Repayment

Everyone who is paying debt know what a drag it is.

Get it done with.

Debt repayment and building emergency fund mostly go parallel. You don’t want to be in a situation where emergency strike while paying your debt with no emergency fund saved. It will only push you further in debt!

Prioritise being debt free. There are other better instruments in market for tax management.

Tax Saving

Now is the time to prevent leakages.

If you have repaid your debt, in all probability you need new tax saving instrument. Depending on your income bracket, your PF, term insurance, health insurance and rent agreement should suffice.

But if not, you can opt for other instruments like ELSS fund, PPF, NPS etc.

If your salary does not have a PF (Provident Fund) component, you should invest in PPF(Public Provident Fund) or ELSS (Equity-linked Saving Scheme).

I find ELSS better because the lock-in is only three years as against 15 years under PPF. And since it is equity-linked, it has better return potential.

Debt Funds

If you still have emergency fund to build, target that first.

If your emergency fund is close to your 3 months expenses, you can start investing some money in debt funds now.

I recommend debt funds because Equity funds have a risk factor that not everyone is okay with, specially someone who has recently recovered from a lot of debt.

Also, I find it less stressful to migrate from majority debt investment to majority equity investment rather than reverse.

Plus it makes sense to safeguard our money in debt investment before venturing into equity based funds.

Equity Funds

Once you have a decent amount in debt funds, you can start your investments in equity funds.

Now term decent here is highly subjective.

I started my equity fund when I had Rs 1.5 Lakh in debt while I know someone who started equity funds when they had Rs 34 Lakh in debt!

But off-course, if my equity SIP is Rs 3000, the other person’s SIP is Rs 1-1.5 Lakh per month.

I know yet another person who does STP into equity fund from their debt fund.

So the strategy can be different and depends on your requirements, life goals, risk appetite and the asset allocation desired.

The step to select any fund in equity or debt, that is, the product, comes after you know your requirement, that is , the goals.

The advanced instruments – Stocks/derivatives/Bonds etc

These  investments need fundamental and technical analysis.

And you need more investment bandwidth to play in these instruments.

So you migrate to doing these once you have all the above going good for you. I see people do this once they have all their major financial goals covered.

Also unless you have deep interest in finance and time to execute, it is better to leave it on experts to work your money in these.

Now, relax a bit

By the time you reach this stage, the chaos would have been managed.

Your head will be in a better place and so will be your pockets.

Again, this may happen earlier for some people than others.

I have seen people do a side hustle to pay off their debts faster or to build emergency fund faster, basically to supplement their investable income.

Stay patient, you will realise money accumulates and grows just by staying disciplined and consistent.


Also published on Medium.

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