Joy of receiving the first salary is something that can’t be described in words. The phenomenon of receiving first salary usually gets followed with buying gifts for friends and families and fulfilling some long cherished dreams. But wait; are you going to spend all you upcoming salaries this way? Definitely your answer is a big ‘NO’. You must remember the saying ‘early bird gets the worm’. In life too an early saver gets a comfortable financial life.

Most common financial challenges with first time earners

  • They fail to figure out how to save and where to invest.
  • They don’t know how much should be saved for future needs.
  • Young earners don’t think much about saving early in life.

Importance of saving and investing early in life

  • You are young and unless you have a family to look after, you are free from added responsibilities. It will allow you set aside more corpuses for saving and making investment.
  • When you are young you can make the most of equity funds. These funds require long term investment to yield significant return.
  • Starting early lets you achieve better returns of your investments. Time plays crucial factor in multiplying your investment.
  • If your dreams are made of stuff like having a car (Rs. 10 lakh approx.), a house (Rs. 50 lakh approx.) and crores for a comfortable retirement then you need to start saving as early as possible.

These targets mentioned above are not easy to achieve. You require a big fat salary or strategic planning to achieve these basic life goals.  The deciding factors of an effective investment are: 1) Power of compounding, 2) Inflation and 3) Risk.

Explore the Power of compounding. It helps your money grow at compound interest. In compound interest the first year’s interest merges with the principal amount and together they yields interest in second year. Give your investment due time to flourish. Calculating the effect of inflation helps you gauge how much corpus you need to accumulate in future to meet all your requirements. Risk is an integral part of any type of investment. A calculated risk may convert itself into more return. Measure your risk tolerance level with proper risk profiling tools.

Smart money moves for a sound financial plan after receiving your very first salary

  • Create your monthly budget:A major portion of your first salary will not stay long in your account and soon evaporate. However, you need to monitor all your monthly expenses. You need to put check on spur of the moment purchases and unnecessary expenses on lifestyle. Creating a monthly household budget will be possible only after that.
  • Liabilities and assets:Create a list of your liabilities and assets. If your education loan or home loan installments are your liability then they should get added to your monthly household spending. Avoid paying bills through credit cards because your credit limit may be 2-3 times more than your salary but at the end of the month your salary remains the same. Keep your expenses lower than your salary.
  • Create Contingency Fund:It is always good to save for rainy days. A contingency fund keeps you afloat in trying situations like a job loss, sudden home shift etc. Initially, keep an amount similar to your three months salary or household expenses and later try escalate it.
  • Health Policy: Get a health policy of at least five lakhs cover and along with that buy a top-up plan of 5 lakh for additional coverage. A cover of 10 lakh is necessary to match the ever growing price of good hospitalization. You may also go for an insurance against accident and disability too.
  • Retirement Planning: Retirement plan should be initiated as early as possible. Here more time truly denotes to more corpus accumulation. An ideal time horizon for building a decent retirement plan is 30 years. With every year you lose from 30, amount you need to invest every month gets increased.
  • Tax Planning: After the arrival of your first salary, you must have got familiar with terms like income tax returns and deductions. In order to minimize your tax deductions you have to invest in areas which provide you tax relief. Buying a Term plan , PPF and NPS provide tax benefits under section 80c.  Tax benefit under section 80E is there for paying back education loan interests. Health insurance premium you pay for your parents qualifies for deduction under section 80D.
  • Make Goal Based Investment: Fix your financial goals before investing. Without fixing certain goals you won’t be able to make your investments work for you effectively. A car, house, retirement, holiday in abroad- your goal can be anything. You can take help from a financial planner to make effective financial plan

Young earners should avoid debt traps like – rolling over credit card dues, buying homes with high EMIs, taking personal loan for spending and the most important is unplanned budget.  

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