Earning one’s own money is one of the most empowering phases in the life of a young adult. Since the time one chooses one’s career path to the time one receives one’s degree, the thought of a cushy job with a healthy paycheck is one of the most important motivation drivers. However, lack of awareness about how to manage that money calls for ‘why financial planning & literacy is important?’ The question leads to the core of what it takes to a successful and secure life.
Multiple studies have proven that 59% of salary earners live pay check to pay check without any provision for contingencies or any benchmarking for emergency funds in sight. Here are a few-tips guide for the first time salary earners to lay a strong financial foundation for their future.
To create a strong groundwork for financial stability, one must create a monthly budget and stick to it. Maintaining a budget and sticking to it helps in keeping expenses in check and also guarantees that a fixed amount is saved regularly for contingencies.
Taxes and planning can be quite a cumbersome process for people. A basic knowledge of taxes, income tax deductions and government tax saving schemes can be helpful in structuring the salary in a way to ascertain maximum benefits.
As the age old lore goes, one must not save what remains after spending but instead spend what remains after saving. A fixed percentage of income (at least 20%) should be earmarked regularly to invest in financial instruments that multiply and/or reap long term benefits. Saving should be a significant part of an individual’s monthly financial routine and should be adhered to with utmost discipline.
Also, by starting to save early, one will benefit from the magic of compounding. Most of us are unable to measure the true cost of delayed savings. For instance, Rs. 10,000 per month saved for 20 years would grow to approx. Rs 1 crore (assuming a 12% CAGR). In 30 years, the accumulated amount would be closer to Rs 3.5 crore. The difference of Rs 2.5 crore which is a huge amount; a 10-year head start can make!
For investing small amounts, systematic investment plans (SIPs) from mutual funds are one option. SIP mode of investing instils discipline and most importantly, keeps the temptation to time the market away. It suits anyone looking to save for a long-term goal by diverting a fixed amount from the monthly salary. Thus, SIPs are a great way of wealth creation since they are subject to the power of compounding.
Another expenditure that may seem insignificant in the short term, but is an integral component in an event of any unforeseen circumstances, is – medical insurance or mediclaim. Research well on a policy that meets your long-term health needs. Also, don’t ignore the importance of a life insurance policy. Take guidance from an expert before you commit to an insurance company.
In most organizations, contribution to a provident fund is compulsory. However, if the workplace does not fall into the bracket of the compulsory employee provident fund scheme, it is prudent for the employee to enroll in a public provident fund scheme on his own accord. Provident fund creates an emergency fund for the employee to use in case of job changes and provides an additional deduction for income tax purposes. First time earners can also look at NPS with high equity exposure as they have longer horizons to invest. They can negotiate with the company to avail NPS benefit and it can help reduce the tax outgo.
Investments and expenses are a product of trial and error and in due course one always discovers a way best for himself to structure his finance. However, it is always early to start managing your finances to avoid sudden distress and pressure. Save for a brighter future.
(By Kusal Roy, MD, Tata Capital Financial Services)