Manorama, Sudeep, Lucy and Imran were all excited after completing their interviews. And they hoped to get a good job with a nice pay. The good news is that all of them got jobs and started their journey in their respective fields. Sudeep is eagerly waiting for his first paycheck as he wants to gift it to his mother who took care of him as a single parent after his father left the world. Lucy and Imran have shifted to other places due to their job requirements. Whereas Manorama has goosebumps whenever she thinks about her first salary. She dreamt to be an independent working woman and her dream has just come true!
As a young athlete, she won a few competitions and received prize money along with medals and certificates. That time was different. She was allowed to use that money to buy new clothes or other stuff of her choice. Now is a different time and she reads a lot about financial planning in the newspaper but had never given a serious thought that she too would be required to do so!
The idea of getting money after putting in so much hard work and dedication. First paycheck- few thousand in your bank account-What to do and what not to do! Plus, it does not end with receiving the first check, it will surely bring a lot of contentment but what about the resolutions that she wants to make?
Finally, the day came. Manorama got her first paycheck. She used a part of it to celebrate her achievement. She paid her expenses out of her salary and whatever was left was kept in the bank as she did not want to indulge in any impulsive shopping. Manorama has a few things on her mind like buying a car and a house. But she thinks that it could take some time before she is able to save for the same. In the meantime, she needs to approach a strategy that can help her build a corpus to use for immediate and long-term purposes.
When you are young like Manorama, you have ample scope for saving and investing. A few more months of earning and the amount slowly rises. It becomes a concern for people who do not know what to do with the money. Keeping them idle in the bank account is not a good idea. Moreover, you can make the most of it if you start investing early. A smart investing strategy can always fetch good returns, so the sooner you begin, the better it will be.
In this article, we will discuss what a young individual like Manorama or any of her friends should do with their money. It is understandable that the financial goals and responsibilities of each individual are different and it might take some more time for a few to start investing. The amount that is invested also differs from person to person, depending on the savings they are left with.
Naturally, when you are young and have no experience with money management, many questions will keep coming to your mind. We have listed down a few things to help you make better planning while you begin your career.
How much do you want to save?
Income and savings are not very stable when you start earning. So before you make any big plans to invest, it is important to decide the amount that you will be able to save and invest. This is not an easy task. Making a budget would be of great help. The balance between income and expenses is not quite clear and it is possible that one may not be earning a very high income during the initial stage of their career on the other.
Allocation of income against expenses is better known via a budget. But there must not be any rigidity when you make a budget for yourself. In our case, Manorama has decided to stay within the budget limits. Though how much ever you try, due to the uncertainties and inexperience there could be some loopholes and it is not necessary that you end up following all the limits you set for yourself.
So be flexible in this period. Allow some liberties and be real. It is difficult to stick to a tight budget during this time, but you may still start building a fund for emergencies by contributing a little towards it. A budget works like an alarm when almost all your money is spent. It hints about the unnecessary expenditure eating up your hard-earned money.
As you begin this learning process, you will realise after a few months how much you are practically able to save. Then comes a time to plan for your investments.
Cultivate a habit to contribute toward an emergency fund
Manorama kept ten per cent of her first salary as part of her decision to save for contingent events. It is advisable to set aside an amount for an emergency fund despite your actual investment plans might take some time to take off. An emergency fund can be kept in your savings account as liquidity is what we usually expect in challenging times.
A savings account is easily accessible whenever you need money. So you need not struggle at this stage to find some highly liquid, short-term investment options. Rather save some money and keep them safe and ready to use to take care of your immediate financial needs. There need not be a fixed contribution initially and it may not be substantial but for the sake of habit, it is necessary that you plan for emergencies so that you do not have to rush here and there to get personal loans if you face any financial crisis.
Over a period of time, it is suggested to set aside a fund that is equal to a year’s monthly expenses. What if there is a change of job or a pause in your career due to your own illness? The regular monthly bills need to be paid even at that time. Medical emergencies also need to be addressed immediately. Once the fund is ready, you can move to other objectives and make an addition to this fund as per your requirements. Liquid mutual funds are a good option. You can withdraw money instantly and while they stay invested, they grow steadily.
Get an insurance cover for yourself and your family
Health insurance is a must and needs to be included in your kitty inevitably. Because hospitalization is a costly matter and in absence of a sufficient insurance cover, your whole financial planning may get disrupted. The recent pandemic has opened the eyes of many. Hospitals may cost you from a few thousand to lacs of rupees. If you take out that much money from your current investments, you will permanently lose the chance to earn money on them. Your capital will be lost and the opportunity that you created from your hard-earned money to take care of medical emergencies will be taken away in a few days.
Manorama has opted for life insurance with a critical illness cover. She wants to add a few more benefits through riders in future. Since her friend is a financial advisor, she did a little research and decided to buy it from a known insurance company. Similarly, you can do your own research and buy an insurance cover.
It is very much important to take insurance for you and your family. The premium rates are very reasonable and there are many options available in the market. You can choose the best product that suits you. Premium paid for life insurance cover helps for tax planning as well. Even in case you are covered under any health plans taken by your employer, it is better to take an additional cover due to certain obvious reasons. Your family members also need to be covered under the insurance package as the health of all the members of the immediate family matters. A sum assured equal to Rs. 10 lakh is advisable. A higher coverage would be better if it is possible.
Remember, the health cover is important to take care of all life-threatening situations and not just for the sake of income tax benefit. The contributions made to PPF can also be helpful while planning for taxes. Once your salary increases, you may choose to contribute more towards such annuity plans voluntarily and claim the benefits. This is a debt investment. So you can choose other options as part of your portfolio other than debt later when you start investing.
Investing your money
The most important and crucial aspect of financial management is to allocate your funds. Diverting your funds in any one direction is not advisable. For example, equity shares. Nor should they be kept in fixed income generating avenues. Balancing the portfolio while achieving your financial targets needs smart planning. There are many life goals and all those should be achieved at the right time. Availability of funds at the time you want to implement the decision is possible only when you do your own research and invest by demarcating between short-term and long-term requirements. When you start earning not the entire picture is clear. It will unfold slowly by the time you are able to save a substantial amount to make you think about it.
The strategy that Monorama now needs to follow is to go only for those schemes that allow flexibility. For example, if she buys a house, she has to dedicatedly pay a monthly instalment for years to repay the loan. A larger part of her income will be used to pay it off. It is not advisable to tie up yourself during the initial period of your career. You can earn handsome returns on your investments by choosing something like equity mutual funds. When responsibilities are fewer and there are no pressures, you are free to take some risks. You can select the instruments that carry risks and pay you nicely. You have the leverage to adjust them against other options if this plan does not work out.
More financial obligations mean a more stringent approach and no liberties. You may buy a car and a house in a few years. The loans will take some time for repayment. And the safety of your investments can become a major concern in future. So better take some risk now and make some profit out of it. By choosing equity mutual funds, adjustments are possible with changes in the level of income or savings.
Manorama started learning the ABCs of financial planning in the first month after receiving her paycheck itself. She has summed up the crux of the above discussion as:
- Make a budget and try to follow it.
- Do not allow rigidities to enter as it is just the beginning.
- She managed to save 5% of her first check in order to cultivate a habit of saving. The money thus set aside is used for creating an emergency fund.
- She chose a health insurance plan for herself though she is covered under the employer’s group insurance plan. Soon she is planning to include her parents as well.
- In the coming months, she will start investing as per her short-term and long-term priorities. She loves to own a car of her own, but it will take some time before she buys one!
- Manorama reads about the financial markets and all. She has plans to discuss everything with her advisor about her investment plans.
Tips to Begin Your Investment Journey
Building a corpus does not happen overnight. It happens gradually and takes years to build it up. Once you advance in your career, the pressure builds up to buy a car or a house. Starting your family is another dimension associated with the progression of an individual’s life chart. Any short-term or long-term decision is going to pay you for the hard work you have already put in. Mistakes happen and it is not possible always to predict the best possible outcome of your investments. The result you expect may be less than or more than the targets set by you. The cost of inflation is a matter of concern when you plan for your investment. What you invest now will pay you after a period of 3-5 years minimum. When adjusted for inflation, the actual returns get reduced by a certain amount.
Keeping all these things in mind, here are a few tips on how to start investing after you start earning.
- There are a lot of websites and apps giving tips on how to invest. Not all of them are authentic. Trust only the highly recommended ones by the users. Similarly, auto investment generating techniques are also gaining popularity. You can try them as you are in the initial stage of investing but make a shift as per your own experiences or as per the guidance provided by a professional advisor.
- Set your financial goals. You can begin with the safer kind of investments like debt funds. They give you fixed returns though not very high. Your capital is secured and it guarantees a fair return over a long period of time.
- You may like to take the risk or avoid it, it is a personal choice. But do not invest in any product where returns are not assured and losing your money is the probability. It is imperative to know the risks associated with any kind of investment product. The kind of return you want comes with its own set of risks. Expecting immediate and higher returns will necessitate taking higher risks.
- Do not stick to just fixed income generating plans, you can include mutual funds in your bucket. As discussed earlier, equity mutual funds are a good option.
- Once you gain some experience, you can diversify your funds among other options too that were not part of your initial plans.
- As your income and investments grow, take the help of a financial advisor to plan for the optimisation of tax benefits while investing. There are many deductions and exemptions allowed under different provisions of the Income Tax Act. Invest during the month of April itself in any financial year to avoid the last-minute hurry and also get the maximum benefits by doing so. Many employees decide to invest in March to save on tax. This results in hurried and unreliable decisions.
- Do not over-rely on any kind of brokers without checking their credibility be them, insurance brokers or stock brokers. Approach things via proper channels.
- Understand the requirements to open accounts with banks or any other institution, by keeping a minimum balance etc. Just like banks, insurance and the stock market also prescribe a few prerequisites and you have to fulfil the criteria. For example, opening a Demat and trading account is a must if you want to invest in the share market. Paying a regular premium is necessary to keep your insurance policy active. Know about the particulars of any such contractual agreements before choosing them.
- It is ideal to save 20% of your salary. Even by investing Rs.1000 in a SIP at the beginning of your career, you can create a huge corpus at the end of your working life. Suppose Manorama invests Rs. 1000 in an equity fund SIP from the age of 24, she can accumulate Rs. 80 lakh by the time she retires. (considering the returns at 12%). But if the investment activity starts later in life, say after 30 or 35, then the returns substantially reduce and the benefit of compounding is compromised.
- Cryptocurrencies are quite a trend. Do not fall prey to provocations, as you have just begun your journey. So are NFTs. Only highly experienced investors and those with extra money can try such options out on a larger scale. Being a newbie, start with PPF, ELSS, NPS and Mutual Funds as and when you think about investing money. A good mixture of equity and debt will always fetch good returns.
- Investing in mutual funds online is very easy. You can open an email account and fulfil the KYC requirements to set up a SIP. The money automatically gets debited from your bank account, and you can increase the contribution as and when you are ready.
Being a newbie, Manorama has made up her mind to follow a ‘to-do list’ for herself. The first paycheck is not just a reason to be happy and feel financially independent for her, but is a milestone in this fresh chapter of her life. A building stands firmly only when the foundation is strong enough to hold it. A few steps that we take while initiating any work/project matter a lot. There is an equal chance to succeed or fail depending on how you start. So, before you take the first leap, think once. And even if you have already started and felt like a few things are not working, you can make amends to your original plans and get fabulous returns.
Often the young aspirants who are not supposed to take on many responsibilities at home do not save or plan wisely. There are cases when they live a lavish life and their financial habits are not disciplined. Later in their life, it becomes difficult for them to face medical emergencies and the retirement life brings many reasons to worry. And then there are others who irrespective of their role in their family, always believe in working towards saving and investing for a better future. They are in a win-win situation and manage to tackle the financial challenges better in life.
Smrutirekha Bhoi