Smart Ways To Start Investing

Hi, Moduers!

Lately, there have been many questions about how to start investing. It is an excellent indicator, as more and more people are becoming aware of the importance of investing.

Firstly, before you start investing, it’s a good idea to ensure that your financial condition is healthy. You can do it by doing these steps:

  1. Make sure your income is more than your expenses. Positive cash flow (having a higher income than expenses) is one of the healthy financial indicators.  It enables us to avoid creating debts and helps us to save, to prepare emergency funds, and to invest.
  1. Pay off your consumptive debt.
    Consumptive debt is debt that is used for consumption purposes and does not generate income either assets. For instance, if someone bought clothes for personal use using a credit card, it is considered a consumptive debt. It’s different if the credit card is used to buy more clothes that will be sold and profit (productive debt). A healthy total debt ratio is 30% of your monthly income. If you have a large amount of consumptive debt and get confused about which one to pay first, you can try these two methods:

    1. Debt Snowball, which is to pay off your debt from the smallest amount.
      Example of a debt list that you have:

      BalanceInterest
      IDR 1.000.00015%
      IDR 2.000.00025%
      IDR 3.000.00010%
    2. Debt Avalanche, which is to pay off your debt from the largest interest.Example of a debt list that you have:
      BalanceInterest
      IDR 1.000.00015%
      IDR 2.000.00025%
      IDR 3.000.00010%

      Both are practicable, and there is no right or wrong to do.

  2. Start preparing your emergency fund. Cashflow is already set, consumptive debts are paid off, so the next step is to prepare your emergency fund. For some people, preparing an emergency fund is deemed less attractive than investing since it does not generate high returns. This fund is where you can make a safety net from sudden and urgent needs such as a vehicle breaks down or gets laid off with an emergency fund. Also, an emergency fund can help you to prevent debt. Since an emergency fund’s purpose is to anticipate sudden and urgent needs, such as getting laid off, an emergency fund can be set up for 3 to 12 times of your total monthly expenses. For example, if A has no dependents and has an expense of 3 million per month, the emergency fund that needs to be prepared is 9 million for 3 months to 36 million IDR for 12 months.Another example, B, who has 4 dependents, including himself as a breadwinner, has 12 million total expenses per month, so B needs to prepare 36 million for 3 months to 144 million IDR for 12 months emergency fund.This emergency fund can be partially deposited in a regular savings account and invest the rest in liquid and low-risk investments such as bank deposits or money market mutual funds.

    Also read: Bank Deposits VS Money Market Mutual Funds: Which One is More Profitable?

    Emergency funds are not recommended to be completely invested since it takes a longer time to disburse your bank deposits and money market mutual funds than withdrawing cash from ATMs or banks.

 

That’s all, Moduers, 3 smart ways you can do before you start investing.

Hopefully, this article helps you, and don’t forget to share it with your peers.

Salam Moduit!

 

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