Finance fundamentals for freshers: 8 top points

Updated: Sep 4 2014, 18:58pm hrs
PiggyLess means more. (AP)
It is unfortunate that personal finance is not a required subject in high school or college. Not surprisingly, most young adults are fairly clueless about how to manage their money when they step into the real world for the first time after landing their first job. Finance professionals never cease to stress that laying the right foundation at the beginning of your career is the key to future financial success. All it takes to get started on the right path is the readiness to do a little reading you don't even need to be particularly good at math.

Here are some steps to take now to put your financial future on track and live a comfortable and prosperous life.

1. Practice Self-Control

Self-control is the stepping stone in managing your finances better. You need to learn the art of delaying self-gratification. In other words, do not purchase any item without measuring its consequences on your finances. If buying that item will not put stress on your finances, go ahead with the purchase. If you have the habit of using your credit card for shopping, use it wisely. And do not carry too many credit cards that you cannot keep track of.

Credit cards should be used only for the convenience of making purchase without the burden of carrying cash. Never use credit cards for consumption using the credit facility offered by this instrument.

2. Set Goals

It is important to have goals to motivate you and save your money. Goals can be of different time horizon short-term, medium-term or long-term. Short-term goals include saving a few hundred rupees every month. Medium or long-term goals include being able to repay a home or car loan. Ensure the goal motivates you enough to help stay on track within your budget. By being clear about what you want to save for, you can become a more successful saver.

3. Follow the Money

Once you've set your financial goals, make a budget. Once you see how your morning java adds up over the course of a month, you'll realize that making small, manageable changes in your everyday expenses can have just as big of an impact on your financial situation as getting a raise. It helps you plan how much money youll spend and how much you will save. It also gives you a clear representation of your financial affairs and helps you live within your means by evading unnecessary expenses or borrowings. A well-planned budget emphasizes the areas of concern and facilitates elimination of wasteful expenses.

Segregate your money into different savings categories: regular saving for daily expenses, short-term saving for emergencies, long-term saving for college fees/higher education of your children and even longer-term saving for retirement. It is important to prioritize your expenses. For example, payment of utility bills, childrens school fees, grocery shopping are some expenses that must be necessarily provided for. The balance money must be used to provide for other miscellaneous and entertainment activities and also should be saved.

4. Plan for Emergencies

Gone are the days when job security was a given. Besides, it is very common for young people to change jobs or decide for higher studies. Having money in savings to use for emergencies can really keep you out of trouble financially and help you sleep better at night. Treat the regular monthly amount that you put into the fund as a non-negotiable monthly expense. Having a healthy emergency fund will provide you the much needed comfort.

5. Plan for Retirement Now

Just as you headed off to kindergarten with your parents' hope to prepare you for success in a world that seemed eons away, you need to prepare for your retirement well in advance because the sooner you start saving for retirement, the lesser principal amount you need to invest to build up the desired retirement corpus. Inflation erodes wealth so it is essential to route your savings to vehicles that can offer you the returns that beat inflation and build the required corpus. Employer-sponsored retirement plans are very useful for this purpose. Otherwise you can also opt for retirement plans available in the market.

By starting early into your saving habit, your money multiplies faster due to the compounding effect. Starting early also provides more options with regard to investment avenues. It also enables you to take on more risk since there is adequate time to recuperate in case an investment goes sour. For example, assume a person sets aside Rs 1,000 towards a financial instrument each year. If the returns were 10% compounded annually, by the end of one year the investment would grow to Rs 1,100; at the end of second year the amount would be Rs 1,210; and at the end of a 10-year period your Rs 1,000 would have grown to Rs 2,594.

6. Dont Trip on Taxes

Tax planning is an integral part of financial planning. Concrete planning on taxes enables you to save as much as possible. This should ideally be done at the start of the financial year. A hurriedly done tax-planning exercise can make you opt for the wrong instruments and may also become a hindrance in yielding good returns. This should be a well-planned exercise, rather than a one-off investment since the risk profile of each individual is different whats suitable to one may not suit the other. Know your risk profile and invest accordingly. Most importantly, do not combine your insurance requirements with tax-saving and investment needs invest in these instruments after careful considering your cash flow.

7. Protect Your Family

An insurance cover helps protect you and your family by providing the financial bedrock should something unforeseen like hospitalisation, injury or death turns you world upside down. Life insurance needs to be systematically considered depending on your life stage along with current liabilities, expectation of future liabilities, number of dependents, financial goals, lifestyle etc. Since life insurance is a long term contract, you do not need to renew it annually but have to ensure the premium is paid before due date so that those who rely on your income remain protected. Ensure that you are adequately covered so that your family will not get into financial difficulty should anything happen to you.

8. Less Means More

Build a well-diversified investment portfolio with an asset mix that reflects your risk appetite, needs and circumstances. A well-diversified portfolio should include complementary asset classes so they can cushion your investments against the vagaries of the market and lower your portfolios overall risk.

The less money you spend on eating out, the more money you will have in your pocket, and in turn, save more. Cut down on the weekend eating, drinking and partying, if possible. If you spend too much money buying clothes, aim to spend less on clothes over a period of time. Yes you can!