When you start working and begin a career, your first thoughts will not be financial planning or saving. Considering the plethora of investment options available today, it is understandable that a new investor, with limited knowledge and experience will get overwhelmed and confused. However, if things are done methodically and in a well planned manner, financial planning becomes pretty simple for a new investor. Although the ‘one size fits all’ model is not applicable for financial planning, a general set of steps can be followed by all new investors when they plan their finances, as follows:
You can take the liberty of spending in the first year: When you start working and income starts coming in, saving and investing are generally not on the top of the priority list for most people. You would wish to buy things you wanted for long, but could not afford it with the pocket money you received as a student. You may want to gift something to your parents or close relatives. You may want to travel around and experience new places with the money you earn. Although it is often stressed that the earlier you start saving, the better it is, it is acceptable if you spend in the first year of your career. For a young person, ‘the desire and freedom to spend’ assumes great importance, and anything which curbs this becomes an object of hatred. Hence if saving and investing are thrust upon them, right from the start, they become averse to this. They have not yet benefited from the money they have earned and many desires remain unfulfilled. So it is not wise to talk about things like finance and financial planning at the beginning. You can take the liberty of splurging on different things during the first year, so that at the end of the first year, most of your wants will be more or less fulfilled. After you have settled in your job and have experienced spending your own money, you can start getting serious and look at planning your finances.
Learn the various aspects of finance: It is easy to take the help of a financial planner and start the process of financial planning. Although this is a more professional and organized approach to set your finances right, you must also take the trouble of getting your hands dirty. Understand the basic concepts of saving and investing, and also how each investment avenue works. Appreciate the positives and negatives of every asset class. You can refer to the internet, blogs, newspapers, personal finance magazines and books and also attend personal finance forums, etc. to improve your knowledge and understanding. When you are clear of the concepts and fundamentals, you can easily comprehend the various happenings in the market and also what your planner says.
Start a Recurring Deposit: A recurring deposit helps you to save regularly and is a safe investment option for a newcomer. It is simple to understand and inculcates the discipline of saving. Therefore, as you begin learning various concepts of personal finance, you must start a recurring deposit side by side. You can invest any amount according to your salary and depending on the amount you can save after your expenses. You must understand that with regular investing, you are not only stopping wasteful expenditure, but are also allowing your money to grow. Do not expect phenomenal returns right from the beginning. A recurring deposit at the beginning of your career is suggested with an idea to get you into the habit of investing regularly, and also to let you see your money grow gradually.
Get the important things done first: Most people start their financial career with the sole aim of building their wealth, without understanding basic investment principles and without completing the must-dos at the beginning. Certain activities like taking a life insurance cover, taking a health insurance cover, having an emergency fund, starting a PPF and NPS account and getting your basic documents in place are of prime importance. Once you establish a risk cover and install a retirement plan, you can then gradually look at new avenues like equity mutual funds, real estate, stocks and other investments over a period of 2 to 4 years.
Establish goals and plan your financial life: As and when you begin to invest in different avenues, you must determine your goals and the timeframe of each goal. You can plan your investments in different areas after defining and prioritizing your goals. Remember to determine the present estimated cost for each goal and then inflate it to the approximate value as on the due date. For example, if you estimate the cost of your child’s marriage to be Rs.10 lakhs at current cost, it can balloon to Rs.76.1 lakhs after 30 years at 7% per annum inflation. Thus inflation plays a critical role when you determine your goals and plan your finances. Do regular reviews and invest wisely by consulting experts.
It is very easy for a new investor to get excited in making money and take wrong decisions while planning his finances. The above steps would help to bring some order and progress in financial life.