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You received an offer letter and couldn’t be more excited to start your new job. While this is a fresh start for your career, it’s also a great time to hit the reset button on your finances.
It’s so important to take some time to reassess your spending and financial goals before that first salary arrives. If you don’t, there’s a good chance you will fall victim to lifestyle creep, end up losing all the money, or still struggle with the same money problems you had before.
For those who have familial responsibilities like parent’s health or a sibling’s education, having no planning to combat these needs leaves the person in a dire situation. Thus, keeping such goals in mind, every individual during this early phase should not just focus on the present but also work on saving and creating a solid base for the next phase of life.
When most people get a raise, they experience lifestyle creep. They automatically start spending more money and their expenses quickly catch up to their higher salary. To avoid lifestyle creep, use half of your pay increase to upgrade your lifestyle and save or invest the other half. If you do this starting with your first salary, you will get the best of both worlds more spending money and an effortless savings boost.
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 times, even those small savings are not channelled 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 to save is to have a Saving and Investment Budget in place. This means that from the pay you take home, you must set aside a fixed amount that you save and then invest wisely.
It is not about how much you save, it is more about starting to save and investing those savings in a disciplined manner. Even it means starting with 1% if your income and then gradually scaling up to 5-10%, most people can easily save 5-10% of their income without feeling the pinch. Eventually, you should try to save and invest at least 25% of your income. This will ensure that over a period of time you will have a sizable corpus for your goals and your portfolio will be diversified by adding other asset classes.
During an early phase of life, most goals are long term in nature. Hence, this is a great opportunity to take good exposure from equity. Most Indians think of equities or stocks (shares) as risky investments. This is exactly why their involvement and presence in the equity market is very low. Those who do dabble in the equity market do so on the based on advice and tips from family, friends, television portals or stockbrokers.
Equity being an asset class, should be a key component of every portfolio as it has the potential to provide the highest post-tax returns, especially in an emerging economy like India. But the proportion of equity in your portfolio can vary based on one’s overall objectives, returns needed for goals, time horizon, investments in other assets and the ability to sleep well in volatile markets.
The quest for money is something every individual undertakes at some point in their life. But what is the result of this quest? This is a question that stumps a lot of people and what makes framing financial goals prior to 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 reason people venture into financial planning. Over the years, it has been observed that most people might be good savers but when it comes to investing, they fail. People can make prudent financial decisions but there exist a whole lot of external factors that 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.
It is also very important 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.
If you are like most young people starting out in your first job, the thought of retirement seems like an eternity away. While it may be true that you have 40 or more years until retirement, don’t wait to begin saving. Even a very small amount can begin to add up thanks to the effect of compounding interest.
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