Many of my friends who are now Chartered Accountants, Company Secretaries, MBAs and Engineers, etc. have started working in corporate sector and are doing very well in their respective fields. On occasional meetings on weekends, they share what they did with their new found love – the pay cheque. One friend bought an Apple I-phone 5S, other one got 10 grams Gold Coin and this one takes the cake who spent his entire salary on shopping in just 5 days. Some of them did save some money, by way of parking the leftover fund in their salary account. They are not wrong in enjoying their hard earned money but I thought of catching them young so that these actions don’t become habit and then there is no recourse.
My recommendations to my friends and all others, who have just joined workforce, would go a long way in their financial journey.
Save at least 20% of your income
Warren Buffet has said “Don’t save what is left after spending; spend what is left after saving”. So, you should save at least 20% of your monthly income and then spend on other things that you need and want. The savings can be invested in across different asset classes – Equity, Debt, Gold in different investment instruments like PPF, Equity MF SIP, Recurring Deposit, Gold Funds, etc depending on your risk appetite and investment time horizon. The younger you are, higher your risk taking capacity and longer your financial goals.
Life Insurance
Just after getting your first job, some relative, neighbour, friend or bank relationship manager will definitely approach you for selling you a dud insurance policy. Don’t buy life insurance policy if you do not have any financial dependants. If your family members are financially dependent on you, then you must buy life insurance; buy Online Term Plan equal to 12 times of your annual income. Don’t fall prey of any other traditional insurance policy or ULIP; how much ever fancy and attractive it may be looking or sounding to you.
Health Insurance
Check with your parents, how much amount of health insurance cover you and your family members have. Looking at the increasing medical and hospitalization costs, you must have individual health insurance cover of at least Rs.3 - 5 lakhs along with a top-up health insurance plan. Buy health insurance cover for yourself and family at the earliest.
Not TIPs, but SIPs for you
Many of you want to make money in stock market and brag about profits that you made by investing in a particular stock when you are enjoying with your friends. Not always a TIP of a particular stock given to you by your friend or relative or colleague. So don’t invest in direct equity simply based on a stock recommended to you by someone; investing in direct equity needs thorough research of the company as well the market. So, if you want to make money in stock market, invest in Equity MF via SIP (Systematic Investment Plan). Investing via SIP is one of the best ways of investing in equity. The only issue with SIP is that you will find it boring and won’t give you bragging rights since you have to invest a fix amount monthly over a period of at least 8 to 10 years to see a magic figure of returns on your investment.
Credit Card
Don’t consider Credit Card as a tool for free money for 45 days. Some of you must be swiping your Credit Card, if you would have used your entire salary before the month end; thinking that you will pay off the credit card dues once you receive your next salary. This is not a good practice, unless you are paying off your dues before the due date. Not paying the credit card dues on time can cost you penalty of as much as 36% to 48% p.a. interest on the payment dues. Not only you will have to pay the penalty; but also it will affect your credit score, which will affect you when you may actually need to take a housing loan or some other kind of loan. So, it is advisable to use Credit Cards only in case of emergencies; instead use Debit Card or cash for your regular expenses.
Tax Savings
You do not want to pay high tax on your hard earned money. So, if you have a taxable income, you should invest in tax savings instrument well in advance and not wait till the year-end. Irrespective whether you have an EPF account or no; it is advisable to open a PPF account in your name. Invest in a combination of EPF, PPF and ELSS Funds of Mutual Funds systematically up to Rs.1 lakh for claiming deduction under section 80-C. Start your tax saving investments from now. You should not wait till the end of financial year for your tax savings investment.
These were the few things that I outlined for them which they should start doing after getting their next month’s salary. Its not that you should just keep saving for your future, at this age of mid twenties; you should enjoy your life and spend money on things you enjoy. But, simultaneously you should develop a habit of savings and maintain a budget of your expenses.
Plan for your future financial goals & invest accordingly. Though most of you must be feeling that investing for your financial goals is too early today; but it’s a good practice to start with because it is always said, “Well begun, is half done!”
Published in: Moneycontrol.com, The Tribune
