“I am thinking of starting an EMI with my first salary for an upcoming apartment. So that, 5 years hence, I will have my own house,” remarked Bhola to his neighbor Mr. Kent, who is a financial advisor.
“But, you already have a home, Bhola. What will you do with the new one?” asked Kent. “I will rent it out and earn from it,” clarified Bhola.
“NO! Don’t be stupid. Unless you intend to stay, do not buy a house. Giving for rent is as good as giving for charity. Otherwise, the house will own you rather than you owning the house!”
Kent continued: “If you start an EMI and lose your job in between, how will you manage it? Then, you will have a neither a house nor job. There are other things for you to set right before thinking of buying a house for investment purpose.”
“Like?” wondered Bhola. Kent took a deep breath.
“Begin with start paying off your education loans, if any. By the way, you will be getting tax benefit too on the education loan.”
Bhola smiled. “Thankfully, I have very little loans. Dad helped in cleared most of it for me”.
“See, Bhola, I have seen many youths splurging on fancy clothes, restaurants and all kinds of trivia to show off their new found earning potential. My blood boils when I see this. The biggest asset you and the youths who land a job in their early twenties is TIME.”
“If you save just Rs.10000 now for the next 30 years, at 15% you will have Rs.5.63.crores.For the same Rs.10000, even if you delay by 10 years (which a majority of earners do), you will be having just Rs.1.32crores – more than 65% drop!Look at the difference – it’s more than Rs.4.16 crores!Use maximum of your salary now to save and invest.”
Bhola asked “But, where do you start?” Kent laughed “Not so soon Bhola, first get some basic things in order. Start with a life insurance.”
“Life Insurance? But, why? I am not yet married and have no dependents,” a shocked Bhola reacted. “Yes. Life Insurance. Life Insurance is not just to protect your loved ones, but is a part of a complete financial plan. Besides, since the premiums are frozen, it will work out to be very cheap when you buy it early. And, the biggest advantage once your life is covered is that even if there is some material change in future the insurance coverage continues. Next comes Health Insurance.”
Flexing his muscles Bhola shot back, “I am fit and very healthy. Do you think I need health insurance?”
“Yes, Bhola, you are young, fit and have a very good lifestyle, but what if there is an accident or a hospitalization due to depression or overwork or some other reason? Since you are young and free from any medical complications, the premium will be lower and you will be given comprehensive coverage compared to the one who is 10 years older than you.
“Your company will be covering you under Group Mediclaim. But, even if they are, the cover will be generally insufficient and will tend to have lots of limits and exclusions. And, besides, you never know when your company changes its insurance coverage policy.
“Normally, there will be a waiting period for certain diseases. All these will have to be covered if you continue with the same insurer for 4 years or so. Besides, of course, there is tax benefit too!”
“Next, you never know when you may lose your job or overshoot your expenses towards a function in house, an illness forcing you to quit your job, a friend asking for hand loan, etc. Just like death and taxes, risk is also inevitable. Towards these, you need to create an emergency fund for yourself.
“Have about 2-3 months of expenses in emergency fund. But, since you have just started earning, start with a smaller amount and gradually increase this whenever your finances permit. And, use this fund for emergencies only.
“After all this comes the investment part. Ensure that you save at least 20% of your income. In fact, since you will have fewer expenses, you should aim for saving a higher percentage of your income.
“If you have time to do research, regularly keep track of companies, only then consider direct equities, but otherwise, you are better off investing in mutual funds. Indian mutual funds have a good track record of consistently beating the benchmark of Sensex and Nifty. Choose funds wisely and learn where to invest.”
“As they say, ‘well begun is half done.’”