How to get the most out of your first pay cheque

Once a regular salary starts getting credited to the bank account, you may become carefree with your expenditures. If this habit is nipped in the bud, it can set you up for better financial outcomes.

How to get the most out of your first pay cheque
While deciding upon various investment avenues, a young investor may prioritise asset allocation with a major tilt towards equity-oriented investment instruments.

It is a proud moment when you get your first pay cheque. The transition from being financially dependent to independent instils a sense of pride and confidence. The feeling of attaining the ability to take future responsibilities on your shoulders propels you on your growth trajectory.
 
However, once a regular salary starts getting credited to the bank account, you may become carefree with your expenditures. If this habit is nipped in the bud, it can set you up for better financial outcomes. 
 
Saving and investing should be your first priority when you start earning. Ideally, you should invest at least 20% of your take-home pay. The earlier you start, the better it is for you. Taking informed investment decisions is something you should consider earliest in your career.
 
Here are the five investments you may consider once you get your first paycheque.
 
1) SIP in Equity Mutual Funds: A monthly systematic investment plan (SIP) in an equity mutual fund is worth looking at. Once an SIP is registered, a fixed amount is deducted from your bank every month. It is used to buy units in a mutual fund of your choice. An equity SIP is one of the most convenient ways of creating wealth by investing in stocks through mutual funds in the long run. While returns are not guaranteed here, we have seen that the equity markets have generated around 12% annual returns on average in the last 20 years.
 
2) Open a PPF Account: Opening a Public Provident Fund (PPF) account with banks or post offices is a good way to take exposure to debt assets. PPF returns 7.1% interest guaranteed. It has a lock-in of 15 years, though partial withdrawals are allowed. PPF helps an investor create long-term wealth in a secured manner. It also gives the investor tax deductions under Section 80C. One can invest a maximum of Rs 1.5 lakh and a minimum of Rs 500 per year.
 
3) Get a Health Insurance Plan: It is advisable to take a health insurance cover which protects you from hospitalisations and unexpected health crises which can drain your finances. The premium paid for health insurance will eventually prove a good decision as you will be financially protected in a medical emergency. More importantly, when young, your health insurance premium will be minimal.
 
4) Divert Monthly Savings To Bank Deposit Or Liquid Fund: Along with monthly investments, you should also save for emergencies. You can park some amount every month into a bank deposit or a liquid mutual fund. At the end of every month, savings can also be directed to these options instead of keeping that money idle in your bank account. A liquid mutual fund invests in debt and money market instruments for the short-term. Typically, money parked in a liquid fund generates better returns than a savings account. This way, not only your savings are safe, but you earn comparatively better interest. You can withdraw the desired amount as per your needs while the rest will remain invested. 
 
5) Gold ETFs: You may consider investing about 5-10% of your monthly investment in Gold Exchange Traded Funds. Rather than owning physical gold, investment in digital gold through Gold ETFs is something one should consider. Having investment in gold-related instruments gives you the benefit of a hedge against inflation; it also helps in diversification. 
 
While deciding upon various investment avenues, a young investor may prioritise asset allocation with a major tilt towards equity-oriented investment instruments. Though there is no thumb rule, it is a good investment approach to ensure your equity investment comprises 60-70% of your overall portfolio. 
 
Debt assets can take care of 20-25%, while the rest can be gold. Equity investments typically beat inflation by a wide margin in the long term. Since a young investor in his early 20s has more than 30 years of working life, he should be more focused on equity investments. Higher equity exposure for over two decades will lead to substantial wealth creation and allow you to become financially independent.

(The author is CEO, Bankbazaar.com)

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