When there aren’t any other financial responsibilities, it’s easy to give in to temptations of splurging money. However, the earlier you start saving, the better it will be for you.
When you have just started working, the steady inflow of money every month gives you a sense of financial freedom. Especially when there aren’t any other financial responsibilities, the money is exclusively available to you. It’s easy to give in to temptations of splurging money on gadgets, fashion and vacation. At this juncture, you might want to remember that a steady flow of income is exactly what you need to start planning your finances. And it’s never too early to start saving and investing. In fact, the earlier you start, the more you benefit as the power of compounding works on your money.
Let’s look at the financial steps you need to take early in your career to make the most of it.
1. Prioritize paying off student loan
There’s no point sitting on your student loan if you have got a job. Moratorium periods are allowed on education loans to give relief to the borrower in case there’s a lag between completing a course and getting a job. However, interest accrues on the loan amount during this period. So the sooner you finish paying off the loan, lesser is the interest burden. Consider prepayment if you can accommodate it with your monthly income or use up every surplus amount you get in the form of annual bonus or performance bonus to prepay the loan.
2. Start budgeting and saving
A budget always helps you understand how much you have, what your expenses are and what is your scope for saving. Try splitting your monthly income in to expenditure and savings in the ratio of 70:30. And set aside the savings portion at the beginning of the month instead of waiting till the end to see what you are left with after all your expenses. This will help you inculcate the habit of saving in a disciplined manner. Budgeting will keep your spending under control without having to compromise on your savings.
3. Set goals to invest in the right instrument
Saving money blindly without mapping it to any goals may not fetch effective return in the right time. So, it’s important that you set goals and have a time-frame in mind to arrive at each of these goals. Basis the investment tenure, your risk appetite and need for liquidity is determined. And so is your investment option. Say, you want to buy a house in 10 years. You have an investment horizon long enough to invest in moderate to high risk assets that will fetch lucrative return. Equity mutual fund or ELSS could be your go-to instrument. For short-term needs such as buying a two wheeler or going on a vacation, or any goal that allows you an investment horizon of a year to two, your risk appetite is relatively low, and capital preservation or liquidity should be your look out. Debt mutual funds and recurring deposit are your go-to instruments for short-term goals.
4. Invest in SIPs
Retirement, or money requirements post retirement, is not the first thing on your mind when you have just started out with your career. However, the sooner you start investing, the bigger your fund grows, thanks to the power of compounding. You can start setting aside a fund every month and invest that amount in SIP mutual fund. The amount can be as small as Rs 500. You can always increase the quantum of your contribution with time as your salary increases. The key here is to start early to get effective returns. Say, you invest Rs 5,000 a month in an SIP fund, you would have a corpus worth Rs 1.8 crore in 30 years if you earn an average annual rate of return of 12%. On the other hand, if you wait for 10 years for your salary to increase and start an SIP of Rs 10,000 a month, your investment tenure would have been reduced to 20 years. So even with an investment of double the amount, 12% interest would fetch only Rs 99.9 lakh at the end of the term.
5. Prepare for emergencies
You might be working very hard and saving even harder. However, all your money could go in containing the financial damages that may befall, if you were to be faced with any emergencies such as a sudden health hazard, accident, job loss, natural calamity etc. Such unforeseen circumstances could even put you out of action and you might be at a loss of income momentarily. At a time like this, you need an alternate source of income to pay for your bills and rent, cover your EMIs and take care of your daily expenses. An emergency fund worth six months to one year of your income comes handy at a time like this. In order to build this fund, set aside an amount every month and put it in an investment instrument that is liquid and has no exit load. To financially prepare against health emergencies, add a health insurance in your kitty. A health insurance policy will finance your pre- and post-hospitalization treatment.
(The writer is CEO, BankBazaar.com)