Dreams, these days, come with a high price tag. A car for Rs 5 lakh, a house for Rs 50 lakh, several lakhs for a decent education for kids and crores for a cushy retirement. In fact, seemingly simple needs have been elevated to dreams due to the high cost associated with them. You require either a large income or a strategic plan to meet these basic life goals.
While the former may not always be easy for the average salaried person, the latter is certainly within reach, especially if you begin at the beginning. Make a financial plan the day you start working and you won't have to scramble to fund each aspiration.
However, it may not be as easy as it seems. "I just don't know how much to save and where to invest, so I don't budget and end up spending a lot," says Harshinder Kaur, who started working two years ago as a probationary officer at a bank in Ganganagar, Rajasthan. She doesn't know how to formulate a plan for herself. This is a predicament many youngsters in their mid-20s face. The twin behavioral devils of ignorance and procrastination push most people into their 30s before they get down to streamlining their finances. This often results in faulty investment choices, flawed portfolios, unmet goals and financial insecurity later in life.
"This category is not a cash cow for advisory firms, and as they have no one to turn to, they often get lost," says Jayant Pai, CFP and Head, Marketing, PPFAS Mutual Fund. We, at ET Wealth, will try to remedy this through our cover story this week. In the following pages, we offer the newly employed youth a step by step guide to plan their finances. We focus on the building blocks they need at this stage: budgeting, goals, investment, insurance, taxation and salary structure. However, this is merely intended to propel them into planning and they will need to research and learn continuously throughout their working lives. Remember, financial freedom is not achieved the day you start working, but the day you get your finances in working order.
1. MAKE A BUDGET & START SAVING
Budgeting is the simple exercise of reconciling your income with your expenses, and should be your first step. Note down your monthly spending as per your ease of usage: Excel sheet, simple diary, mobile app, or desktop. The aim is to know how much you spend under various heads. "I use Excel sheet to keep track of my spending and know what percentage of my salary goes where," says 24-year-old Saugata Palit, who has been working as senior executive in a private firm in Delhi for the past 18 months.
After you have budgeted for 3-4 months, you will realise that your expenses can be sorted into three categories: essential, discretionary and entertainment. "Tracking of budget is important not only to identify mandatory and discretionary spends, but also ensure that you don't overspend," says Vinit Iyer, CFP & Founder, Wealth Creators Financial Advisors.
Once you've identified the outgoing amount, put away 10-20% of your salary every month before you start spending. If you don't know where to put it, start with your bank account. Try to opt for a sweep-in account that has a fixed deposit linked to it as it will fetch you a rate higher than 4%, which you get from your savings account. This will help inculcate a lifelong saving habit and make sure that you money starts to work for you immediately.
As financial planner Pankaaj Maalde says, "It's important that your money does not lie idle." This is because with very few liabilities and responsibilities, this is the ideal period to save and take advantage of the power of compounding. The earlier you start saving, even if it is a small amount, the more time your money will have to grow.
Even as you start saving, another first is to start educating yourself about every aspect of personal finance. "Read articles and books to understand concepts like saving, investing, protection, debt, inflation, compounding, etc, and how these are intertwined," says Pai. The more informed you are, the better your decision-making.
2. FRAME YOUR FINANCIAL GOALS
You have started saving, but will you have enough to buy a house 10 years down the line, or even a car five years hence? People tend to save aggressively and invest with extreme vigour, but do so blindly, jeopardising their goals. This is a mistake common to most investors, irrespective of the age group. The next step then is to frame your goals.
Don't just make a mental note of the things you want to finance, but write these down in detail. Split your goals into three categories: short-, medium- and long-term goals. Then list each one clearly, along with the number of years to achieve each, and the exact amount you will need. Once you have penned down your goals, you will be able to determine how much and for how long you will need to invest.
Don't forget to factor in inflation while calculating the amount since it will shoot up the value of your goal. If you decide to buy a car that costs Rs 5 lakh today after seven years, it will cost you Rs 8.5 lakh if you consider 8% inflation. Similarly, the post-tax returns from a fixed deposit that offers 7.5% return may not be able to beat the rise in prices over the long term.
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Content Credits: Riju Dave
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