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What are financial goals and why are they important?

You are in a stage of life wherein it is understandable that you are unsure whether you should save or invest. The answer is probably that you should do both.

It really depends on your current financial situation. The choice between saving and investing depends on a few factors. For instance, if you have any financial liabilities, such as a student loan, you should focus on paying these off before you start saving or investing for any other financial goal as the interest you pay on these loans is generally higher than the interest you would earn on your savings.

As you have just started to earn and in case you have no loans that need to be paid off, it is a good idea to inculcate the habit of saving some money to meet financial emergencies: to build an emergency fund. Financial emergencies could be in the form of a medical crisis or a an accident that you may have when travelling. This fund should be available with you instantly in the form of physical cash, however not highly recommended, or on a checkings account wherefrom it is possible to make quick withdrawals from bank ATMs.

As a rule of thumb it is generally considered prudent to set aside 4-6 months of your monthly salary to be able to pay for any unexpected bills.

In case you do not have any loans and have some money already saved; you could consider investing. The decision to invest depends on the time frame for which you are able to put money aside without needing it and the risk that you are willing to take with money.

Savings are usually used to meet your short term needs. Investments on the other hand, generally entail a longer horizon: from six months up to several years or even onto your retirement (if you wish to invest to for your pension needs).

The goal of investing is to provide returns that are higher than what you can earn on your savings account, and grow your money over a period of time. The amazing aspect of starting early with investing is that you will benefit of the power of compounding

 

TIPS

  • Don't spend all your money, but make sure you save or invest some for future needs.
  • Set aside 3-6 months of your monthly savings to create an emergency fund
  • If you have the ability, start investing as early as possible as you will benefit a lot from the power of compounding.
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Mutual fund investments are subject to market risks, read all scheme related documents carefully.