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New employment: What to do with your money

You’ve landed your first job, and your first salary- aka Financial Independence- awaits you. You have a whole list of things ready on how to spend your money that includes a lot of fun plans, shopping and a number of expenses. However, boring as it may sound, starting to save and invest early in your career right from your 20s is the best way to set yourself up for a secure future.

Here are some handy financial tips that you can follow to not have regrets later on in life:

Distinguish between your wants and needs

Credit cards and easy EMI options can make you splurge on items that you don’t really need. Needless expenses- like a new cell phone or an updated fitness tracking gadget or another pair of expensive shoes- are all lost opportunities to save for your financial security. Spend what you have left after you are done with your planned savings for the month, not the other way around. Adopt some financial discipline early on, contain your shopaholic instincts and tame your spending habits.

Budgeting your expenses for the month will definitely help; categorise them into what’s necessary, discretionary and entertainment. This will let you prioritise and have some control on your expenses and also curb the overspending urge.

Set your financial goals

Most dreams come with a price tag, say the 50k vacation, the 5 lakhs car or the 70 lakhs home. So just like you set your fitness and travel goals, set your financial goals too, dividing them into short-term (up to 3 years), medium-term (4-7 years), and long-term (over 7 years) goals. This will help you understand when you will need how much, and accordingly how long you should stay invested in what instrument. Over the years, it will be very satisfying for you to see yourself meet these targets on time.

Start building an emergency fund

Stash away 10-15% of your income towards your emergency corpus and treat this as sacrosanct – to be used only during a real emergency say sudden loss of job or illness in the family. This ‘go to’ emergency reserve should be sufficient to at least take care of your expenses of up to 4-6 months. Avoid putting this amount in any equity-linked instrument.

Take advantage of investing early

Let the magic of compounding work in your favour- that will make your small monthly saving into a massive sum over the next 25-30 years. You can start with Rs. 1000 per month. Don’t worry about the smallness of this investment as it will be more than covered up by the much longer time available for that money to grow. Don’t wait till your income is higher, as what you save and invest in the first few years of your career cannot be made by the higher savings of the later years.

Take small risks

It’s a good idea for even risk-averse investors to allocate 10-15% of your portfolio in equity/stocks. Your money needs to grow at a faster rate than inflation to allow you to maintain your lifestyle and take care of your expenses for many years. This can’t be done if you park your entire savings in safe Fixed Deposits only. So don’t stay ignorant, do your own due diligence and adequate research on various market-based financial products, and put your money to work for you.

Set up an automated SIP

A good way to regularly save and invest is by automating your investment process. You can fix a mutual fund SIP (Systematic Investment Plan) amount deduction directly to your salary account on a fixed date every month. You can start an SIP with even Rs. 500 per month. Also, keep your expenses account separate from your savings account.

Don’t spread yourself too thin  

While investing early is a wise thing to do, don’t blindly follow any financial advice or get duped into attractive investment schemes. Take account of your personal circumstances in mind – if you already have a lot of unavoidable mandatory expenses and student loans to pay off, then getting stuck with multiple lock-in investments may only leave you stressed every month-end with cash crunch and rising debt situations.

Provident Fund is a great investment (EPF and PPF)

Employee Provident Fund (EPF) is God’s gift to investors. It’s the tax-free portion of your salary and earns an easy 8% interest every year. Even if your basic salary is above Rs. 15,000 per month, you would be a fool to opt out of this retirement savings scheme if the employer is ready to contribute 12% of your basic pay as part of your Cost to Company (CTC). Don’t worry about your reduced in-hand salary at all.

Also remember, dipping into EPF after job changes will hurt your retirement plans and the savings corpus will get spent in unnecessary expenses. So don’t withdraw it prematurely.

Public Provident Fund (PPF) is the safest and best long-term investment option in India. You can plan to invest upto Rs. 1.5 lakhs per annum in PPF and get the benefit of tax-saving under Section 80(C). The interest earned is also tax-free. On maturity of the PPF account (15 years), you will have the option of extending the investment period by another 5 years.

Gradually ramp up your savings

You may not be earning very high in your first job and you may have a lot of fixed expenses to take care of like rent and education loan, so you can start saving with say 1-5% of your income, but ensure to gradually increase this savings% with every annual increment. Take it up to 20-30% of your income, depending on your personal circumstances and financial goals.

While you will have multiple financial goals like buying a house or a car, getting married, travelling et al,  remember that you also need to start saving for your retirement.

Invest in yourself

This is the best investment advice for the freshers at work. As a young professional, invest in attending conferences, reading books, getting a new certification – anything that can help you develop new skills and advance in your career. This is the fastest way to land a new opportunity or get a pay hike.

To summarise, keep things simple and avoid any complicated investments that you don’t understand. Maximise your tax-savings, review your investments periodically and consider the tax implications on the returns that you earn and live within your means. Your financial independence will not come on the day you start working but on the day you get your finances streamlined. If you want to build wealth, make investment a priority rather than an afterthought.

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