Make the Best use of your Initial Salaries

Here are seven ways to get the most out of your first few salaries

Vivina Vishwanathan, Mint 17/3/14


Life changes once you start earning. There’s money in hand, but also more responsibilities. Priyanka Khurana, 23, will join BSE Ltd in Mumbai as a management trainee in June. So, now that she will be earning for the first time, has she decided what to do with her pay? “First, I will splurge on my brother; I will take him for a rock concert. Then, I will leave a part of my salary in my bank account,” said Khurana. Any investments? “I will figure out something a couple of months later,” came the reply.

Shubhshree Mathur, also 23, and a junior fashion designer in Jaipur, who started working in September 2013. “My mother’s birthday was around the time I got my first pay. I bought gold jewellery for her,” said Mathur. Investments? No, came the answer.

Financial planners say you should start investing as early as possible. What better than the first paychecks? Here are seven things you must (not could) do with your first few salaries.

Pay off education loan

Many of you who are just out of college may have education loans to take care of. This should be your first target, and start paying off this loan using money from your first salary itself so that you can close the debt as soon as possible. “You should start paying your loan as soon as possible. You also get a tax benefit on education loan under section 80E of the Income tax Act,” said Surya Bhatia, a Delhi-based financial planner. The entire interest that you pay is tax deductible. A default on the education loan can be an expensive mistake as it will affect your credit score, which will in turn harm your chances of getting loans from banks in the future.

Keep track of expenses

With income comes expenses. This could be rent, phone bills, equated monthly instalments (EMIs), and many more. It’s important to keep a track of these. Besides helping you understand your cash outflow, it also helps you keep a tab on unwanted expenditure.

The best and the simplest thing to do is write down whatever you spend in a notebook or on an excel sheet. Keeping a record will tell you what you spend on, how much you spend, and how often—it’s a simple analysis and the best way to find out where you are going overboard.

Study financial products

This is one kind of study that will stay with your throughout your life. After expenses, whatever surplus remains should be invested and saved. Unfortunately, not much importance is given to financial literacy in our schools and colleges. How to save, how to manage money, how to invest, which products are in the market, what these products mean and other such topics are not part of basic or higher education.

But now that you are on a threshold, it’s best to get familiar with financial products. “You don’t have to do any financial course or get in touch with any financial planner. You can find the basics of investments on Internet, financial blogs or books and newspapers,” said Suresh Sadagopan, a Mumbai-based financial planner.

Considering that people who have just started earning are very young, their risk appetite will be high. Hence, you can look at investing aggressively. “But there is another argument that people so young lack experience and may not be able to deal with volatility. So you need to understand your risk appetite first,” said Srikanth Meenakshi, co-founder and chief operations officer, Questionnaires to help you along are readily available on many financial portals. You could also start reading about or watching videos on products such as mutual funds, fixed income products, equity, debt, and the others.

Save for small goals

Just because it may be some time before you are able to understand products doesn’t mean that you can’t start saving. Don’t wait and plan for the right time. Simply because that never happens. Start immediately with whatever you have.

Saving for small goals like buying a laptop, camera, mobile phone or a vacation, will automatically put you into the habit. But don’t put yourself on too tight a budget; you will get demotivated and stop saving. Instead start saving small amounts.

Also, avoid getting into a debt trap. “If you want to buy something, start saving for it and then buy the product. Don’t buy with a credit card or with EMIs as it is very easy to get into a debt trap,” said Anil Rego, a Bangalore-based financial planner.

You can start investing in liquid mutual funds for short-term goals. If you are in the lowest tax bracket, you can start with recurring deposits to get into the habit of saving.

Buy an insurance plan

The general misconception is that with an insurance policy, you should look at the amount you will get in hand after, say, 20-25 years. Many get overwhelmed by the amount that an insurance agent quotes as premium. Firstly, you need to understand what insurance means. Insurance helps you protect your assets in case of unforeseen events. Say, your parents are financially dependent on you; then you should take a life insurance policy. Go for a term plan—it gives high cover at a low price as it only pays your nominees in case of your death, and doesn’t return any money if you survive the policy. Buying a term plan online makes it even cheaper. The premium you pay qualifies for tax benefit under section 80C.

If you don’t have any dependants, you don’t have to bother about a life insurance policy right now. But you should definitely look for health insurance, even if your organization gives you health cover. “You should consider taking at least a Rs.3 lakh health cover. This won’t cost more thanRs.4,000 per annum,” said Sadagopan. And, again, there is a tax incentive on this up to Rs.15,000 under section 80D of the Income-tax Act.

Keep 10% for long term

You may be 20 or 21 or 25 years old today. But you will be 60 or 70 years old after what seems like many years. And you may have retired by then. So, you will need a retirement corpus to survive the years that you will not be working. What you save from when you are in your 20s till the time you retire, is what helps take care of your retirement period. To build this corpus, you need to keep aside at least 10% of your income for this long-term goal. The earlier you start investing, the lesser you need to invest. You can start with simple products such as Employees’ Provident Fund and Public Provident Fund.

Reward yourself

Of course, you have to be responsible and handle money judiciously. But this doesn’t mean you can’t have fun. Pamper yourself whenever you reach a goal or have extra money to splurge. Rewarding yourself for self-discipline makes setting a financial goal more fun.


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