It is important that we learn to plan our finances early in our careers. The right investments at the right time can help you build a good corpus for your future.
With this guide, we’ll tell you how to invest your first salary.
Basic Financial Concepts That Impact Your Money
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Compounding & Time
Let’s give you an example to tell you how compounding works on your money. Say you invest Rs. 10,000 at an interest of 10%. By the end of one year, you will have accumulated a total investment of Rs. 11,000 which is the principal plus Rs. 1,000 as interest.
By the end of year 2, you will have saved Rs. 12,100.
How did that happen? The interest of Rs. 1,000 that you earned in year 1 earned a further Rs. 100 in year 2. This way, because of the concept of compounding, your money is never idle.
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Risks
Almost all investments have a certain degree of risk. It is generally understood that the younger you are, the better your risk appetite. Younger investors can afford to take more risks with their investments because they have lesser financial commitments and responsibilities.
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Inflation
Remember that how fast your money grows in relation to the rate of inflation determines how your wealth increases. While compounding helps to multiply your money, inflation doesn’t.
Additional Reading: Financial Planning Ideas
Make a Financial Plan
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List assets and liabilities
Make a note of what you own and what you owe. A car is an asset, while a loan is a liability.
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Your income is your primary revenue channel
Remember that your paycheque funds your savings and investments.
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Make a budget
Create a budget and spell out your expenses for the month. Your budget will give you a fair idea of how you are spending your money.
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Start saving
Build a savings habit. It is a good idea to try and salt away at least 10% of your income to start. You can gradually increase your savings according to how much you can afford.
Here’s a tip: Pay yourself first before you pay the bills. Stash away a certain amount of your monthly income before you begin paying your bills.
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Emergency Fund
Everyone should have an emergency fund that acts as a financial safety net, in case of, well, emergencies. It is advisable to save up to 3 to 6 months of your expenses in an emergency fund.
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Invest in Mutual Funds
Need a safe way to make your foray into the stock market? Invest in Mutual Funds. Are you looking for short-term investments? Choose to invest in Debt Funds. Equity Mutual Funds are a good option if you’re looking to remain invested for a long term.
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Get Health Insurance
Beat the rising costs of medical care and be prepared for any health emergencies with a Health Insurance policy.
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Choose your investments carefully
Evaluate your investment objectives and your risk appetite before choosing your investments. Invest according to your individual requirements.
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Review your investments regularly
Don’t forget to review your investments periodically. This will help you analyse if your investments are growing as expected and will allow you to make changes to your investments, if necessary.
Additional Reading: Common Financial Planning Mistakes
Remember, save early to enjoy a comfortable financial future.