Last Updated on April 18, 2023 by Admin
During this Covid-19 pandemic, we all have witnessed that most of the employees across the globe lost their jobs, and also the various companies are not able to pay the salaries on time to their employees. Those who have saved money to face situations like this are not in much trouble, but those who were not prepared for this face financial distress. If you are young and recently joined your first job, kindly check these financial planning and investment tips to make your life prosperous in the coming years.
It’s always better to learn the art of personal financing and start saving from your first salary. Also, the simplest way to become rich is to follow the rules of financial planning. For young employees, the early you start saving for your future needs, the better it will be for you.
For a fresh graduate in his/her twenties, it is always an exceptional feeling to start a new job. The feeling of financial independence, standing on one’s own foot is a great confidence booster.
However, what is most important is that with great financial independence comes financial responsibility. It is effortless for new earners to get carried away. So what do you do in this case?’
Here we are taking a look at a few things you should do in the New Year to strengthen your personal finances. Just landed your first job? Start your financial planning journey with these tips. Making a small number of investments at an early stage will lead to a substantial amount of wealth in the long run.
Perfect your financial planning for personal finance management and improve your knowledge. Savings and investment tips and why saving for retirement is an important part of your planning.
Financial planning for individuals and financial planning for salaried employees. Best investment tips for students and beginners. Find the answers for how much savings I should have at 30? How much savings should I have at 40? Read to know about the best investment tips for a salaried person.
1. Create a budget
A budget is a line-item accounting of all your income — salary, maybe a side gig, perhaps income from an investment — and all your expenses. The whole purpose of a budget is to lay everything out in front of you to see where everything is going and make some tweaks if you’re not currently on course to meet your goals.
One way to analyze your current cash flow is to run it through the popular 50/30/20 budgeting framework.
With this approach, the goal is to spend 50% of your after-tax income on essential costs (e.g., rent/mortgage, food, car payments) and 30% on other needed expenses (say, phone and streaming plans) or dining out.
The final 20% is for savings: building your emergency reserves, socking away money for retirement, and saving up enough funds for a down payment on a house or your next car.
You can use an Excel or Google Docs spreadsheet to help you create a financial planning budget and track your progress. There are also budgeting apps you can sync with bank accounts that can make it easier to track spending in real-time.
2. Saving for Future Expenses
Save Whatever You Can (No amount is less)
Typically, most of us budget our expenses; we first pay taxes, take care of mandatory expenses like EMI’s, rent, etc., and then spend on lifestyle expenses. After bearing all these expenses, we save what little is left. Many a time, even those small savings are not channeled into productive investments.
Burning one’s fingers in stock trading based on tips from friends and well-wishers or landing up with costly investment-oriented insurance policies are some of the most common mistakes people make at a young age.
The best strategy for financial planning is to have a savings and Investment Budget in place. This means that you must set aside a fixed amount that you save and then invest wisely from the pay you take home. The balance can then be spent guilt-free.
It is not about how much you save. And it is more about starting to save and investing those savings in a disciplined manner.
Even it means starting with 1 percent of your income and then gradually scaling up to 5-10 percent, and most people can easily save 5-10 percent of their income without feeling the pinch.
Eventually, it would help if you tried to save and invest at least 25 percent of your income. This will ensure that you will have a sizable corpus for your goals over a period of time, and your portfolio will be diversified by adding other asset classes.
Let us recall the time when our mom gave you a piggy bank (gullak). Back then, it used to be a fun activity for you. No matter what amount you earn, big or small, you must first set aside some amount in the form of savings. Then, out of the remaining, you can look to plan your expenses.
The habit of saving helps us in times of financial need. It saves us from the ordeal of seeking out a loan and prevents the possibility of getting stuck in a debt trap.
Budget About 30% of Your Income for Lifestyle Spending includes movies, restaurants, and happy hours—basically, anything that doesn’t cover necessities. By abiding by the 30% rule, you can save and splurge at the same time.
3. Set Financial goals
The quest for money is something every individual undertakes at some point in their life. But what is the result of this quest? This question stumps many people and makes framing personal financial goals before investing such an important juncture.
The value that people attach to money is different for different people. Security, education, travel, philanthropy are only some of the reasons people venture into financial planning.
Over the years, it has been observed that most people might be good savers, but they fail when it comes to investing.
People can make prudent financial decisions, but many external factors prevent them from doing so. Thus, figuring out what value money holds for them, charting a financial journey, and working hard on that journey is important.
One of the easiest ways to do this is to list down “What’s important about money to me?’ E.g., What’s important about security to me? Why is making sure my child goes to the best universities so important to me?
The answers to this question vary from person to person; a child’s education, security for my family, leading a better, more comfortable lifestyle. However, the next step for each person is to ask themselves, “Why is this particular reason important to me?” Until this answer can be whittled down to “Because it makes me happy,” keep asking yourself the question repeatedly.
Once this concept is clear, the next step is to understand your own tangible goals for which money will be required. A good way to start is by defining your goals and quantifying them in terms of the amount and the time you want to set to achieve the goal.
Even though your long-term goals might not be very clearly defined at this stage in life, it is important to give them serious thought.
Saving and investing to collect funds for your higher education or marriage (which can be met within two years) is a short-term goal. Investing in buying a house is a medium-term goal (two to five years). Saving for your future family and retirement are long-term goals (above five years).
It is also essential to have some liquidity. This can be done by keeping four to six months of expenses in either a savings account or a liquid mutual fund from where it can be withdrawn within a day, in case an urgent need arises.
4. Invest for the long term
Like most good things in life, wealth creation takes its own sweet time. The sooner you begin, the larger the corpus you can create. Unfortunately, quick fixes seem to be the want of the hour.
Thus, most people want to create a large corpus in a concise amount of time or begin investing too late. This turns out to be the perfect recipe for disaster and must be avoided as much as possible.
An early start coupled with a regular and disciplined investment pattern plays a significant role in wealth creation.
An early start for financial planning ensures that you gain a head start over others and that you’ll retire with a larger corpus than someone who starts later in life. This is because the power of compounding works best over long tenures (5 to 30 years) and therefore rewards the early bird.
Albert Einstein explains that compounding is the eighth wonder in the world, the enormity of which is not understood until it’s experienced first-hand.
For example, if you were to start investing at the age of 40 and invest Rs. 10,000 per month at a 12 percent rate of return, you would receive Rs. 99.91 lakh at returns by the age of 60 (over a period of 20 years).
However, if you were to begin investing the same Rs. 10,000 one year earlier, at the age of 39 years (over a period of 21 years), in an investment that yields 12 percent a year, you would have Rs. 1.13 crore by the age of 60.
Simply losing out on one year of investing would reduce your corpus by a whopping 13.95 lakh (over ten times the money you invested in a single year, i.e., Rs. 10,000 x 12 months =Rs. 1.20 lakh).
If there were a higher rate of return, such as 15 percent, the difference would be as much as Rs. 25 lakh. This is a clear indication that time does create money.
The disadvantages aren’t limited to simply that much; starting late in the investment and financial planning game leads to increased stress on one’s finances as one tries to catch up with others.
A late starter also needs to invest more each month to create the same kind of corpus. The key is to invest for the long term to achieve goals and accumulate wealth and not to make a quick buck in a short span of time.
5. Take Life Insurance
This is probably one of the most important investments that each individual must necessarily make as a part of your financial planning. For new earners, this should be one of the first investments as well.
A life insurance policy provides a financial safety net for your loved ones, provides a sense of financial security and, therefore, peace of mind.
While choosing an insurance policy, one must conduct proper research, read and understand the terms and conditions carefully, check the lock-in period and not hide any information from the insurance companies.
These days term insurance is very famous and also recommended. However, there are various types of life insurance plans, and one must choose the plan carefully.
A term insurance policy is purchased for a fixed term, like 20 years or 30 years, and so on.
6. Improve Your Salary Structure
Most of us give the most priority to Cost to Company (CTC). Whereas CTC indeed is one of the important aspects of our job, one must also keep an eye on how taxation works.
Did you know that you could easily save up on tax by tweaking and adjusting your salary structure? Moreover, all this and much more can be done without changing the total CTC.
Sounds cool? Let’s have a look at how this is possible.
The basic component, which is probably the major part of your salary, generally includes basic pay, House Rent Allowance (HRA), dearness allowance (DA), and special allowance.
All employees, especially the new earners, must know that, apart from the HRA component, every component is fully taxable.
In this line, 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 basic would mean higher HRA, DA, and provident fund contributions. This is because these components are generally linked to and are calculated as a certain % of the basic salary.
Now, what a higher basic salary implies is that the corresponding higher DA will be taxable, and the PF contributions are tax-free, but this shall reduce your take-home salary.
To sum it up, new employees can save up on their taxes by adjusting their salary structure to make it more tax efficient. Good knowledge of the taxation system and rules thereof helps to save taxes.
7. Consulting a Financial Adviser
A financial planner is skilled at advising clients to make suitable investments to meet 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.
8. Create your personal investment Portfolio
Constructing your first investment portfolio is an achievement in itself. After all, it is your first step towards wealth accumulation.
Building a portfolio involves distributing your investment amongst asset classes like equity, debt, and cash. It is known as asset allocation. However, equity is the best tax-efficient and inflation-countering vehicle. However, putting all your money into inequity isn’t a prudent move.
It would help if you diversified the sums that are to be allocated in each asset class as per your investment goals. It is always wiser to be a long-term investor to accumulate a greater corpus. Your investment horizon would ideally be around 10-15 years.
Once you have constructed a portfolio, you need to rebalance it periodically to keep the portfolio risk within expected limits. This is relevant from the standpoint of market fluctuations. At the very outset, you may decide the time intervals after which you will be rebalancing. You can do it once every six months or a year.
Start with identifying goals like buying a car or financial planning for retirement. Categorize those goals into short-term and long-term. Goals that can be achieved within 1 to 3 years are essentially short-term. Goals that need a horizon of 3-5 years are called medium-term goals.
Goals that require more than 5 years to achieve our long-term goals. Then identify your risk appetite, i.e., the degree to which you are comfortable with a fall in the value of your investments. If you can digest, say, a 20% fall in the value of investments, you are a high-risk seeker.
Else, categorize yourself as a risk-averse person. After identifying your goals and risk appetite, you can conveniently select the investment haven. A risk-seeker may go for a diversified equity fund. Conversely, a risk-averse short-term investor may go to a liquid fund or a balanced fund.
Mutual funds have come up as the most versatile investment haven. You can start a Systematic Investment Plan (SIP) at a nominal sum of Rs 500. Under SIP, a fixed amount gets deducted from your saving and is invested in a mutual fund scheme of your choice.
9. Avoid Credit Cards
It’s good to keep credit cards until the time you are paying the dues on time, but once you start exceeding your credit limits, you may fall short of money in the future. Going cashless through credit cards, no doubt is a better option, but that should be done under proper control.
Do not get excited by the credit limit given to you, which is approximately 2 to 3 times your salary. It is advisable to do the necessary expenses from your credit card and keep the expenses lower than your salary limit. Eventually, you have to pay your dues from your salary unless you are not earning money from some other sources.
10. Don’t Fall into a Debt Trap (Avoid Personal Loan)
Lack of debt management may eat up a major part of your monthly salary. You may end up borrowing fresh loans to pay off older loans. If it gets out of control, then you may fall into a vicious debt trap.
Your critical life goals may get sidelined, and even your retirement may get delayed. Though, strategizing your debt payment may keep you away from such troubles. All you need is to be informed about how much you owe to whom. And chalk out a schedule to pay them off.
In case you have a lot of debt to shoulder, start paying off the most expensive one. In fact, credit card has been regarded as the most expensive form of debt. As soon as your salary gets credited each month, pay off your credit card balances in full.
Don’t fall for the lure of paying off the minimum balance. Even before you know it, the interest will spiral up to eat out all your savings. Make it a point to use the credit card only in case of emergency. Always keep debt as a last resort. As far as possible, make down payments for your purchases.
In case you are shouldering big-ticket loans, look for a portability option. You can transfer your loan to another bank offering a lesser rate of interest. In this manner, you will save a lot of money going out as interest. Never borrow for assets that are depreciating.
Additionally, tax-inefficient loans like personal loans can be avoided as far as possible. You can think of saving and building a corpus to fulfill your goals. In this way, you can avoid falling into a debt trap.
11. Retirement planning
Start saving for your retirement. Why is it necessary? Because the early you start, the more corpus you will generate at the time of retirement.
For example, if you are at the age of 25 and want to retire at 55, you will get 30 years of time horizon on your investments. So, by saving Rs.3000 a month, you can generate approximately up to Rs. 2 Cr. Isn’t it that good? You can even increase your investment amount from time to time.
12. Do proper tax planning
Tax awareness is necessary for every employee, whether you currently fall into the tax bracket or not. If that is not the case, then you may never know why that much tax suddenly got deducted from your salary. So, it is better to calculate your taxable amount every year for your financial planning goal. Invest in such a way that you can avail tax benefits altogether.
13. Emergency Fund
Always try to save 3 to 6 months of your expenses in a bank account that can be used in any emergency. To maintain an emergency fund, you need to develop a habit of saving. Save before making any purchase of goods. As soon as you get your salary transferred, shift your saving amount into another bank account so that you shouldn’t be using that amount for any purchase.
Wrapping Up
We have tried to cover most of the important personal financial planning tips and guidelines you need to adhere to. I hope that these financial tips will help you in the future to make the right decisions and achieve your financial goals!
