In today’s world when you start earning after years of hard work trying to get your degree, with that free cash flow you taste the freedom to spend your own money, on things you want to. But this is the time you need to have a sense of priorities and proportion, so as to not make the mistakes likely in this phase. We discuss here, what all should be prioritized:
In today’s world of social media, conspicuous consumption is usually a priority, especially when you have just started to earn. Things like high-end brands, eating out, credit card spending, showing your ability to afford, etc. have a lure, which is natural. If you are lucky, your parents and the environment you grew up taught you this skill that is to practice self-restraint. If not, keep in mind that the sooner you learn the fine and delicate art of delaying gratification, the sooner you’ll find it easy to keep your personal finances in order. You can effortlessly buy an item on credit the minute you want it, it is better to wait until you’ve saved up the money for the purchase that when you actually deserve it. There is a saying “save money today, tomorrow money will save you”. Live for yourself, not to show off to others.
Know Where Your Money Goes
Once you have gone through a few personal finance books (see my recommendations below) and met few savvy friends/colleagues, you will realize how important it is to make sure that your expenses are not exceeding your income. The best way to do this is by budgeting. Once you see how the cost of your morning latte from the nearby coffee shop adds up over the course of a month (forget the entire year!), you will realize that making small, manageable changes in your everyday expenses can have as big an impact on your financial situation as getting a raise. I would suggest that you save atleast 35 % of your salary in the first five years of your career and that will help you build a corpus which will allow to splurge for the rest of your life. Non-essential expenses need to be curbed, to achieve this objective. The way compound interest works, the earlier you start saving, the earlier you can start spending from the returns of your savings! If you invest well in the beginning, after the first ten years of career, atleast 20 % of your disposal income would be coming from the returns of your savings.
Control Your Financial Future
If you do not learn to manage your own money, other people will find ways to (mis)manage it for you. Remember self-help is the best help. Some of these people may be ill-intentioned, especially the unscrupulous commission-based financial planners, including the relationship manager of your bank where you get your salary. Did you know that the mutual fund which you banker recommended, he gets a hefty commission it whereas you can buy it directly from the MFs website and save ~ 1.5 % per annum? Instead of relying on others for advice, take charge and read a few basic books on personal finance. Once you are armed with knowledge, do not let anyone catch you off guard—whether it is a significant other who slowly siphons off your bank account or friends who want you to go out and blow lots of money with them every weekend. Again, practice self-restraint.
Where to invest
As a youngster, as you start saving and investing, you need to get your asset allocation right. A few pointers:
1. Purchase v/s renting your accommodation.
Though there is an emotional aspect of owning your own home, it is better to wait out a few years till your career stabilizes. There is a calculation involved here, distinct from the emotions of owning your home. That is, rental yield. If you own a residential flat and rent it out, the amount of rent you would receive per year is much less than, say, what you would earn on bank term deposits. Also, these days youngsters are a lot more mobile, buy a house only when you know which company and city you want to spend your life in. By that time, you would have built up a good corpus for a down payment as well.
2. Investing in equity vs debt
Equities give you a better return than debt, however they are riskier as well. Start with a diversified large cap mutual fund and track its performance monthly. Learn the basics on your own. Basic rule of thumb is subtracting your age from 100 and that is the percentage what you should be in equities. The balance should be in fixed deposits and debt mutual funds. As you get a better handle of how the financial markets operate, slowly start diversifying in mid and small caps. The new generation ideas like a cryptocurrency should be avoided at the beginning atleast! Of course, gold is an old time favorite and say 5-10 % should always be parked in the time-tested asset.
3. Health is wealth.
Get a good healthcare plan even if your company provides you one as you build a “health history” with your insurance provider for a later stage. Remember one day you will retire, and your company provided coverage will stop, that is an age where you will need it the most.
4. Get a Grip on Taxes
It is important to understand how income taxes work even before you get your first salary and ever after. When a company offers you a starting salary, you need to know how to calculate whether that salary will give you enough money after taxes to meet your financial goals. Ensure that you avail every possible deduction to maximize your take home salary.
In the initial phase of your career, it is advisable to have as light burdens as possible. You should also inculcate discipline in your expenses so that things do not run out of control and you can start saving for your retirement or even taking risks when you have enough experience to start your own venture. The earlier you start, the higher ‘compounding effect’ you get on your investments.
Good books to read.
- “I will teach you to be rich,” by Ramit Sethi
- “Retire Before Mom and Dad,” by Rob Berger
- “The Money Manual,” by Tonya B. Rapley
- “Spend Well, Live Rich,” by Michelle Singletary