Financial Planning For Young Earners

By BankBazaar | May 22, 2018

If you’re in your early 20s and aren’t sure how to save or invest your money, you’re in luck. We have some great financial advice for young earners everywhere.

Financial Planning For Young Earners

A common gripe among salaried youngsters these days is that they don’t know how much to save for a rainy day. More importantly, they aren’t exactly sure where to invest their money. Therefore, it goes without saying that financial planning is the need of the hour for many young earners.

If you’re in your early 20s and are at the dawn of your career, we’ll help you successfully plan your finances. Let’s begin with the most important factor in creating a financial plan. Making a budget.

Make a budget to begin your savings

Take a piece of paper and note down your monthly expenses on it. You can divide your expenses into three broad categories. These are essential expenses, miscellaneous expenses and entertainment expenses. Track your budget to make sure that you don’t go overboard with your spending.

As soon as you calculate how much your monthly expenses are, stash away 10-20% of your monthly paycheque before you begin spending money for the month. You are important. Pay yourself first.

Additional Reading: 6 Common Budgeting Blunders And How To Fix Them

Where to salt away your savings

If you are still unsure about where to save your money, start with your bank account. Set up a sweep-in facility and link your account to a Fixed Deposit. This will make your money work for you, earning you a higher rate of interest compared to a regular Savings Account.

Learn about saving and investing money on the go

As you aim for financial success, learn how savings and investments work. Make regular deposits into your savings and sit back and watch the money grow.

What are your financial goals?

Think about the bigger picture. How much money would you need for various milestones during your lifetime? Think ahead and set your financial goals. List them all out. Set a timeframe within which you want to achieve each goal.

This way, you will get an idea of how much you will need to invest and for how long you will need to wait until you are financially ready.

We’ll help you choose investment instruments based on different investment tenures.

First, you must understand the different investment periods.

Short-Term Investment

A short-term investment period ranges from 1 to 3 years.

  • Ideal investment allocation

Consider a 100% debt allocation or invest 90% of your money in debt instruments and 10% in equities.

  • Where to invest

You could choose to invest for the short term in Liquid Funds, Recurring Deposits, Fixed Deposits or Short Term Debt Funds.

Medium-Term Investment

Medium-term investments are those that are held for 4-7 years.

  • Ideal investment allocation

Think about investing 70% in debt instruments and 30% in equity instruments.

  • Where to invest

You can explore investments in Balanced Funds and Equity Linked Savings Schemes.

Long-Term Investment

If you’re willing to remain invested in various financial products for more than 7 years, look for long-term investment options.

  • Ideal investment allocation

You could invest 100% in equities if you are comfortable with equity investments or alternatively you could invest 80% in equity and 20% in debt instruments.

  • Where to invest

Your long-term investment options could be Equity Funds, Public Provident Fund or National Pension Scheme.

When deciding your goals remember to take into consideration these factors among others:

  • Your earning capacity
  • Your dependents
  • Financial loans

Additional Reading: Is Investing In NPS Worth It?

Maintain flexibility in your investment portfolio

It is important to make sure that your investment portfolio allows for any changes in your circumstances that you may face in the future. For instance, you may get married or have children. This will require you to realign your investments to cater to any additional expenses.

Invest in the right instruments

If you haven’t yet identified your financial goals, don’t ignore savings. Start small and save your money in instruments such as Fixed Deposits or Recurring Deposits. Choose investment instruments that will match with your financial goals.

You will also need to take into consideration returns from your investments, tax liabilities and liquidity before choosing your asset allocation.

Need help choosing investments?

Returns An average of 12%
Liquidity Equity Mutual Funds permit you to withdraw the money whenever you need it
Tax benefits Regular Equity Mutual Funds do not provide tax benefits under Section 80C of the Income Tax Act

Short-term capital gains are taxed at 15%

No long-term capital gains tax is levied

Investment term Long term
  • Debt Mutual Funds

Returns Approximately 8-9%
Liquidity Investors in Debt Mutual Funds can withdraw the investment any time
Tax benefits Debt Funds do not provide tax benefits under Section 80C of the Income Tax Act

Short-term capital gains on Debt Funds are taxed at a minimal rate

Long-term capital gains tax is levied at 20% along with indexation

Investment term Short term to medium term
  • Fixed Deposits

Returns Fixed Deposits offer depositors returns of approximately 7.5 – 8%
Liquidity Liquidity of a Fixed Deposit depends on the term of the deposit.
Tax benefits Only Tax Saver Fixed Deposits offer deductions under Section 80Cof the Income Tax Act.

In case your interest income is more than Rs. 10,000 you will be taxed according to your applicable tax bracket

TDS is also applicable on Fixed Deposits

Investment term Short term
  • Recurring Deposits

Returns A Recurring Deposit offers depositors returns of 7 – 7.5%
Liquidity The liquidity of a Recurring Deposit depends on the term of the deposit
Tax benefits Recurring Deposits do not give depositors any tax deductions under Section 80C of the Income Tax Act.

In case your interest income is more than Rs. 10,000 you will be taxed according to your applicable tax bracket

TDS is also applicable on Fixed Deposits

Investment term Short term to medium term
  • Public Provident Fund

Returns Investors in the PPF scheme get returns of 8.10%
Liquidity Investments in PPF have a lock-in period of 15 years

You can make withdrawals from your PPF account under special circumstances

Tax benefits You can get deductions under Section 80C of the Income Tax Act upto a limit of Rs. 1,50,000 per year.
Investment term Long term
  •  National Pension Scheme

Returns Investors in the National Pension Scheme can get an average return of 9.47% across all three fund categories
Liquidity No option to liquidate the investment before the investor attains the age of 60 years

Part of the maturity amount has to be compulsorily invested in an annuity scheme

Tax benefits Investments in the NPS give investors tax benefits under Section 80C of the Income Tax Act.

40% of the maturity amount an investor gets is exempted from tax

Investment term Long term
  • Equity-Linked Savings Schemes (ELSS)

Returns Investment in ELSS funds offer investors a 5-year average return of 13%
Liquidity ELSS investments are the only tax saving instrument which has the shortest lock-in period of 3 years
Tax benefits ELSS fund investments provide tax deductions  under Section 80C of the Income Tax Act upto Rs. 1,50,000

The maturity amount is completely tax-free

Investment term Medium term
  •  Unit-Linked Insurance Plans

Returns ULIPs give investors a return of 8.9% based on a 5-year average of all the fund categories
Liquidity ULIPs have a lock-in period of 5 years
Tax benefits Investments in ULIPs offer tax deductions under Section 80C of the Income Tax Act.

The maturity amount is completely tax-free

Investment term Long term
  •  Gold ETF

Returns Gold ETFs give investors a return of 6 – 7% based on a 5-year average of all the fund categories
Liquidity Investors can withdraw their investments in Gold ETFs at any time
Tax benefits Investments in Gold ETFs are not eligible for tax deductions under Section 80C of the Income Tax Act.

Short-term capital gains is taxed at a minimal rate

Long-term capital gains is taxed at 20% along with indexation

Investment term Long term

Take advantage of tax benefits

If you’ve just started earning, chances are you may not be paying too much in taxes. It is always beneficial to learn everything about tax deductions, exemptions, and how to save on paying taxes. You can minimise your tax outflow by choosing to make investments in tax-friendly instruments.

Choose the right type of insurance

Insurance protects you and your dependents in the event of an unfortunate accident, disability or demise of the insured person.

We’ll help you choose the appropriate insurance to safeguard yourself and your loved ones.

Life Insurance

The most common types of Life Insurance policies available are Term Insurance, Endowment policies and Money Back policies. These are traditional insurance plans.

  • A Term Insurance policy gives you a sizable Sum Assured for a very reasonable premium. A term plan gives you no returns but provides your dependents with a death benefit.
  • Endowment policies and money back plans offer a lower Sum Assured amount for a more expensive premium. The returns gained on Endowment plans and money back policies are also low.
  • Unit-Linked Insurance Plans are insurance plans that are linked to the market. These plans have a lock-in period of 5 years. The returns an investor can get are market-linked.

Which Life Insurance to choose

If you have dependents, your best option among Life Insurance policies is a Term Insurance plan. This plan would give you lifelong cover. You must choose an income cover that is at least 5 – 6 times your annual income.

Health Insurance

Health Insurance is another important investment for an individual. Don’t bank only on an employer-provided Health Insurance plan.

A basic Health Insurance cover of Rs. 3 – 5 lakhs is a vital addition to your portfolio. Compare all the health plans carefully to select suitable riders to add to your policy. A few useful riders you could consider are critical illness rider and disability income rider. A basic Health Insurance plan would cover hospital expenses for an insured person.

In case you don’t have employer-provided Health Insurance, you could opt for a health cover of Rs. 3 – 5 lakhs.

If you have a Health Insurance plan from your employer of Rs. 2 lakhs, consider getting an independent top-up Health Insurance plan with a cover of Rs. 3 lakhs.

Steer clear of debt traps

With financial independence, many first-time earners are susceptible to the novelty of owning a Credit Card. However, as long as Credit Cards are used wisely, they can definitely be financially beneficial.

Avoid accumulating Credit Card dues

Always remember to pay your Credit Card bills in full. By just paying the minimum balance on your Credit Card regularly and not clearing the total outstanding amount, you are liable to pay high-interest charges of almost 3% every month.

Too many loans in your pocket

Just like too many cooks spoil the broth, loans have the same effect. One loan too many can put a strain on your finances. This will make it difficult to save and invest your money.

It is generally accepted that you should not spend more than 40 – 45% of your income on clearing loans.

Taking on a Home Loan with a high EMI

Remember to buy a house only after careful consideration. Learn about how interest on a Home Loan is calculated and pay attention to the EMIs, loan tenure, and types of interest before you plunge into a big financial commitment like a Home Loan.

Build an emergency fund

An emergency fund is one of the most important options that an earning individual needs to consider. An emergency fund should generally consist of at least 6 months of your income as savings. This will help you tide over any financially rough times.

Additional Reading: How To Put Together An Emergency Fund

Remember to make a budget and stick to it, plan your savings and invest wisely for a secure financial future.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

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