25 Sep 2020
First Salary – The joy and travails of becoming independent
Stepping into adulthood is an exhilarating experience for any young individual. Not only does it imply foregoing the inherent reliance on parents for self-sustenance, but there is also a sense of empowerment from earning one's own money. A notification of salary credited at the end of each month creates that innate urge to splurge on things worth cherishing – be it clothes, accessories, gadgets, luxury goods, etc.
However, very few youngsters consider saving a portion of their hard-earned money in a disciplined manner. As a result, many of the young salaried professionals are forced to survive on a month to month basis. They spend irresponsibly, at the start of the month, which ultimately compels them to cut expenditure even on necessary things till the next salary credit. There is usually no contingency planning for rainy days such as urgent household repairs, purchase of essential items, or even medical emergencies.
The essence of financial planning
Financial planning, therefore, becomes important more than ever. It starts with imbibing fiscal discipline as soon as one starts earning. We will share a few essential tips to help you get prudent with your money and build a sound financial foundation.
1. Fiscal discipline
It is very easy to swipe your card and buy what you want, whether through lump-sum payment or on credit. Instead, rationalizing your expenditure and reconsidering the need to buy is a much more difficult decision. As per financial experts, a rule of thumb is suggested to start investing at least 20% of your salary upfront and then gradually increase the amount based on your comfort levels. This routine introduces a much-needed discipline and helps in doubling down on unnecessary spending.
2. Insure for major expenditure
Bad times can befall on anyone and at any time. Having health and life insurance policies with adequate coverage is recommended to protect oneself against any such unforeseen event. Starting early gives the added benefit of locking in on lower insurance premiums due to longer payment tenure.
3. Capitalize on tax benefits
The Government of India’s Income Tax Act, 1961, offers various tax benefits on investments under various sections. Apportion your savings across the various available tax-saving instruments to minimize the tax deductions from your salary.
4. Invest through the SIP route
Initial salaries are usually not sufficient to make lump sum investments. A systematic Investment Plan (SIP) is a preferable method of investing in term deposits, mutual funds, or any other financial instrument. In this method, investments can start from as low as Rs. Five hundred per month and provide the much-needed flexibility to manage your savings along with the expenses. SIPs also let you plan for various goals in a disciplined manner.
5. Maintain a contingency fund
Some emergency situations may create an urgent requirement of readily available cash. While investing in the long term is recommended, one should also provide a contingency fund, which can be immediately liquidated. Experts recommend building a corpus of approximately six month’s salary under liquid fiscal instruments to overcome any typical emergencies.
Spending one’s own salary is a joyous and satisfying feeling. Also important is to keep a tab on saving adequately to be prepared for the uncertainties of life. With proper knowledge about financial planning, one can savor their hard-earned wealth in the present as well as in the future.
To understand how to start planning your investments, check out our SIP Planner.