It is always an exciting experience to begin a new job. Being financially independent and able to stand on one's own feet is a fantastic confidence booster. Nevertheless, with financial autonomy comes financial responsibility. Here’s what you should do to manage your income better and save for the future advises Harsh Jain, Chief Operating Officer, and Co-founder, Groww.
1. Make A Budget And Stick To It
The first and foremost money management tip for each and every new earner is to create a budget. This may sound very clichéd and common. However, the importance of this simple habit cannot be emphasised enough. A budget is a basic financial statement that records the expected income and expenditures for a predefined period. To create an optimal budget, you can follow the well-known ‘50-30-20 rule’, where 50% of your after-tax income can be used for needs and obligations such as groceries and basic necessities, bills, rent, insurance premiums, and minimum debt repayments. Next, 30% of your income can be allocated to 'wants'; these are things you aspire for. However, if expenditure on the list of ‘wants’ is unregulated, it can quickly encroach on the savings bucket as well. Finally, 20% of your post-tax income must be saved and then utilised through investments. Following this rule will not only help you stick to your budget but will also empower you to exercise due diligence in your financial matters.
2. Build Your Savings
While needs and wants cater to your well-being in the present, the savings bucket is what will see you through in the future. No matter what amount you earn, big or small, you must first set aside a portion of your salary, in the form of savings. It is crucial to start saving early on in your career, and once you start, make sure to stay consistent to build the habit of saving. To stay motivated in your saving journey, set a goal for your savings, such as funding higher education, purchasing a vehicle, investing in real estate, or investing in financial asset classes. Each year, as you earn more, save more by gradually increasing the saving amount.
After planning your savings, the next most important thing is to put them to good use. Instead of keeping the collected savings dormant, you can safely invest them in the financial asset class of your choice by determining the right investment avenue as per your risk appetite and financial goals. For the risk-averse, safe low-risk investment options such as Fixed Deposits, Recurring Deposits, PPF (Public Provident Funds), and SIPs in Non-Equity Mutual Funds, will help in generating a moderate ROI over the savings amount.
3. Creating An Emergency Fund
The creation of an emergency fund is directly linked with the attitude towards savings. A lot of young people live by spending their cash inflows, without saving for the future. While it’s okay to go with the flow, life is uncertain and you need to have extra savings, in order to overcome unexpected financial hurdles. An example of a life event that could require a lump-sum fund could be a medical emergency, robbery, fire, or a natural calamity that causes major financial losses. It is advisable for new earners to set aside 3-6 months' worth of expenses in a bank account towards setting up an emergency fund. This fund should be created from the very beginning of one’s career.
4. Management Of Debt
In the time of inflated lifestyles and instant gratifications enabled by the indiscriminate use of credit cards and “pay later“ apps, young individuals tend to accumulate a lot more debt than they are capable of repaying. The primary issue with debts is that the easy repayment facilities make us complacent and we tend to be satisfied paying the EMIs even if it means paying interest in the long term. While the interest amount does not feel much, in the long run, this can be a major source of money leakage in your personal finances.
Hence, to keep debt levels in check, start by making a list of all ongoing debts and loans you have and arrange them according to the interest rate they accrue in descending order. Accordingly, plan ahead to clear off your credit card debt as soon as possible. Similarly, you can direct resources to other important debts when you get a salary hike or a yearly bonus so that they are reduced faster. Once you know the wealth inflows and outflows, you will be able to exert greater control on how you want to spend your money and consequently become more mindful of your spending habits.
5. Life And Health Insurance
For new earners, life insurance should be one of the first investments in order to ensure the financial security of their loved ones. You can select from different types of policies available such as term insurance, unit-linked insurance plans, endowment plans, money-back policies, whole life insurance, group life insurance, retirement plans, etc. In order to pick the right policy for you, begin by keeping in mind your current income, then assess your needs and lifestyle costs along with the number of dependents to determine the right amount of cover required. Next, calculate the insurance premium for the preferred time duration using online calculators and make sure to compare plans to select the right fit as per your budget.
Most employers provide their employees with corporate group health insurance policies that secure them from a range of medical issues, provide benefits for pre and post-hospitalization, and also include defined family members such as spouses, children, and parents. Furthermore, group health insurance policies offered by your employer may have lower premiums than market policies and must be renewed each fiscal year.
6. Maximise Your Tax Savings
New employees or new earners must understand how the taxation system works in our country. A certain portion of our hard-earned salary goes to the government towards taxes. In this regard, it is important to understand how we can invest not only to earn returns but also to save taxes at the same time. Everyone is eligible for a deduction of âÂÂ¹150,000 under Section 80C of the Income Tax Act. Section 80C, one of the most used sections for saving on taxes, covers schemes such as ELSS, Public Provident Fund (PPF), five-year tax-saving bank deposits, five-year post office time deposits, National Savings Certificate (NSC), Sukanya Samriddhi Account, and Employees’ Provident Fund (EPF), etc. Out of these, ELSS funds, which have a lock-in period of 3 years, not only help save taxes but also help generate higher returns.
7. Investing In Liquid Funds
Many investors use liquid funds to create an emergency fund. They offer reasonable returns at lower risk and are as liquid as savings account deposits. Liquid funds are a type of low-risk mutual fund that can give you returns that are higher than fixed deposits and savings bank accounts. The core objective of a liquid fund is to provide capital protection and liquidity to investors. A liquid mutual fund is a debt fund that invests in fixed-income instruments like commercial paper, government securities, treasury bills, etc. with a maturity of up to 91 days. The net asset value, or NAV, of a liquid fund, is calculated for 365 days. Furthermore, investors can get their withdrawals processed within 24 hours. These funds are designed for investors with a 3-month investment horizon. Hence, before investing in these funds, ensure that you create an investment plan accordingly.
8. Fixed Deposits
FD (fixed deposit) is one of the most popular investment options in India. People often recommend it to their children as a must-do option. It is not very surprising to see our friends and family investing in fixed deposits. This traditional investment option is popular for generating steady but assured returns. In fact, financial experts deem fixed deposits suitable for risk-averse individuals. It also comes in handy for building an emergency corpus or even a retirement fund. Typically, FDs come with a lock-in period of 5 years. They offer around 7-8% returns p.a.
9. Plan And Improve Your Salary Structure
New employees can save money on their taxes by adjusting their salary structure to make it more tax efficient. The basic part of your salary, which is probably the biggest part, is usually made up of basic pay, house rent allowance, dearness allowance, and special allowance. What all employees, especially the new earners, must know is that, apart from the HRA component, every component is fully taxable. In this situation, an easy and logical way to reduce tax liability could be to cut the total basic pay and adjust it as perks or long-term benefits. New employees must also understand that a higher base would mean higher HRA, DA, and provident fund contributions. This is because these components are generally linked to and calculated as a certain percentage of the basic salary. A higher basic salary means that your higher DA will be taxed and your PF contributions won't be, but your take-home pay will go down because of this.
10. Consulting A Financial Adviser
A financial planner is skilled at advising clients to make suitable investments with the objective of meeting a desired financial target. The expertise is often very beneficial, especially for those who do not possess the professional expertise and or time required to plan their finances. Consultancy may not necessarily be seen as a cost but as an investment. However, this is avoidable, if and only if, you are well-read and can manage your own investments.
Also Read: A 5-Step Guide To Building A Retirement Fund