Financial planning is important, and you must take it seriously from the day you start earning your own money. If you don’t know where to start, here’s what others like you have been doing.
Just started working? That’s great! But have you started your financial planning yet? Okay, don’t fret now! We’re here to help. Here are 6 tried-and-trusted financial tips that every new earner must take into account in order to ensure a sound financial future. Ready? Read on.
Budgeting is important. And one of the first ways to get started with a budget is figuring out where you spend money every month. While certain monthly spends such as rent, groceries, travel and utilities are easy to determine, it is the other miscellaneous spends that you’re likely to overlook. Such expenses that are usually anywhere between Rs. 100 to Rs. 500 (or maybe even a little higher) may go unnoticed, but these maybe eating a huge chunk of your income as the month goes by.
Penning down each of your transactions for a couple of months will help you understand your spending pattern. And once you’ve a good understanding of your expenses, it will be easy for you to allocate a budget for each expense you incur in a month. If you find penning down expenses a difficult task, there are several money management apps available that can get this done easily.
Creating an emergency fund
If you were to seek help from a financial planner, one of the first things they would ask you to do is to start an emergency fund. For young earners, the top financial priority should be an emergency fund. An emergency fund can help you easily tide over any unexpected expense that comes your way – such as a medical emergency, sudden loss of job, vehicle repairs, a broken/lost phone, etc. With a decent emergency fund in place, you wouldn’t have to borrow money from anyone, hence keeping you safe from debts.
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So, how much money should you be saving in an emergency fund? Well, ideally, you should stock enough to cover at least 3 to 6 months of your monthly expenses. Plus, this money should be easily accessible. So, the ideal investment tools for keeping this fund are liquid funds and recurring deposits (RDs).
Additional Reading: To Have Or Not To Have An Emergency Fund
Charting your financial goals
These days, credit is easily available – all it takes are a few details and a click. This has certainly changed the way today’s generation spends and saves money. This paradigm shift can especially be seen when it comes to big-ticket expenses like buying gadgets, large appliances and holidays.
While it does make sense to take a Personal Loan or use your Credit Card to cater to these expenses, remember that these are borrowed credit. And unless they are used with caution, they are indeed a recipe for financial troubles in the future. We’d say that the best way to save for your big-ticket purchases and financial goals is by saving or investing a certain amount of money every month. Here’s how you can go about it:
Time horizon: 1 to 3 years
Goals: Vacations, gadgets, appliances, emergencies
Investments: Since these goals have a short time horizon, it is best to invest in debt instruments such as liquid funds, recurring deposits, short-term debt funds. Here, liquidity and capital preservation precede returns.
Time horizon: 4 to 6 years
Goals: Marriage, education, own car, clearing debts
Investments: For mid-term goals, you’d require your investments to maintain a balance between risk and returns. Keeping that in mind, the best investment avenues for you would be corporate bonds, hybrid funds and Fixed Deposits (FDs).
Time horizon: 7+ years
Goals: House, kids’ expenses, retirement
Investments: With time on your side, you can focus more on returns and wealth building. For these goals, you’d want a high corpus at the end of the investment period, hence you shouldn’t shy from taking risks. Ideal investment options include equities, ULIPs, PPF and NPS.
Additional Reading: A 5-Step Approach To Deciding Your Financial Goals
A fund for the fun times
Savings and investments aside… You just started working, don’t you want to have some fun every now and then? How about a small budget for the fun times? Sounds good, right? While allocating budgets for your monthly spends, you can reserve 5% to 10% of your income to splurge on parties or buying your favourite stuff. However, make sure that you do this only after you’ve catered to necessary expenses.
Do not overlook insurance
It is necessary that you buy insurance at an early age. The reason – you can get insurance, both life and health, at a much lower premium than you would if you bought it when you are older. It isn’t all that necessary to have a Life Insurance at a young age, especially coz you don’t have dependents. But having a Term plan for other needs, such as having a back-up coverage for your existing liabilities like an Education Loan you’re repaying, etc. makes sense. Also, a Health Insurance would serve its purpose, irrespective of age.
All about taxes
Since it’s your first job, it’s possible that you may be earning less than 5 lakhs per annum and do not fall under the taxable income bracket. However, that doesn’t mean you stay oblivious to anything and everything related to taxation. You’ll need to understand how tax saving works if you want to save tax once you fall under the taxable bracket.
Additional Reading: Tax-Saving Investment Options Under Section 80C
Keep the above tips in mind and your finances will be sorted. If, in any case, you’re facing any financial troubles, just click the link below for help.