Harsha is young and healthy. She started working two years ago as a probationary officer at a bank in Pune. She does not worry about the future. Therefore, she does not save or invest, and end up spending a lot, without formulating an investment plan for herself. This is a predicament many youngsters in their mid-20s face.
1. Time to Reset: Think of money and finance just like you think about your health and physical fitness. Starting financial planning from the day you start working & sticking to it throughout your working span can definitely take off the pressure when you are close to retirement. To do financial planning, you need to have good advisors who truly understand your goals & aspirations. Good advisers will make you feel valued. Invest a small amount in something that’s simple to understand, like a mutual fund.
2. MAKE A BUDGET & START SAVING: Budgeting is the simple exercise of reconciling your income with your expenses. First step is Note down your monthly spending using any of these tools : Excel sheet, simple diary, mobile app, or desktop. Once you’ve identified the outgoing amount, Save & invest 10-20% of your salary every month before you start spending. This is the time you have very few liabilities and responsibilities. Therefore ideal period to save and take the advantage of the power of compounding in the reputed Mutual Fund schemes and to start your money to work for you immediately.
It’s important that your money does not lie idle. The earlier you start saving, even if it is a small amount, the more time your money will have to grow.
Let’s assume you want Rs 1 crore when you retire. You can reach the target by investing just Rs 2,000 every month, provided you start saving at 25 and manage to earn 12% returns.
3. FRAME YOUR FINANCIAL GOALS: Write down your financial goals 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.
There are other things you need to consider while deciding goals. “The nature of your income, earning capacity in the coming years, dependants, loans and personal priorities must essentially be considered while framing goals, Also remember that these milestones may alter somewhat with your changing circumstances, say, after getting married or having children. You will then have to make the necessary adjustments. If you think you cannot do so on your own, take the help of a financial adviser who takes into account your specific needs and wants.
4. INVEST IN RIGHT INSTRUMENTS: Once you have prioritized your goals, then think about converting your savings into investments.. “If it’s a short-term goal, keep it in debt; if it’s for the long term, it should be mandatorily equity. The medium-term goals should have a mix of debt and equity. This is because debt will offer you the safety of capital since you need it in the short term, while equity has historically given the highest returns in the long term. For near-term goals, opt for liquid funds or short-term debt funds. For the medium-term, you could choose balanced funds and equity linked saving schemes. For the long term, equity mutual funds could be your choice.
5. MAXIMISE TAX SAVINGS : It is important to brush up your tax awareness at the earliest. Start with avenues that offer tax deduction of Rs 1.5 lakh under Section 80C,
“Do not be obsessed with investing just for saving tax as some expenditures may be useful,” Then opt for investments that fit in with your goals and needs, or those that are being made by default.
“You could also use insurance and health care related expenses for dependents astutely. These would include premium spent on health plans under Section 80D, which is up to Rs 25,000 for self and dependents, and Rs 30,000 for senior parents.
Another important thing is to calculate the returns from your investments after considering the tax.
6. Plan for the Unplanned: Life is not linear, Women are more likely to step out of the workforce to look after children than their male spouses and that’s something young women should be mindful of. If you plan to stay out of work for many years, you might need to ensure that you have money saved for that time period as well as for re-training costs, so you can go back into the workforce
Young working women should save and invest thinking as if they might not find a partner who can help contribute to retirement funds, child-care and a home.
7. Improve Salary Structure for Tax Saving: It is equally important to structure your salary well to maximize take-home pay and minimize tax outgo.
While you may not have complete control over the way your salary is structured, employers today are flexible enough to design it your way. However, before taking a final call on a particular pay structure, consider your long-term and short-term financial goals. Modifying the tax structure can simultaneously impact your net take home and your retirement corpus as some components of the package may not come to you immediately and others may be either full taxable or tax-free.
8. AVOID DEBT TRAPS: You should understand the difference between needs, wants and greed. When you start earning, you start enjoying the power of money Plus in the initial stage you have less responsibilities. It’s difficult to curb the consumerist urges.
Use a mix of credit and debit cards. The credit card is used only to earn and redeem points. Pay the entire bill every month and never rolled over the due amount because the cards charge a very high interest of nearly 3% a month. Fix a spending limit for yourself, say, 20% of your income otherwise there is a good chance that you will run out of funds before the month ends. You may then have to consider loans to fulfil your needs.
“There are so many lucrative offers on cards that people don’t think twice about taking these up. Avoid buying expensive gadgets on loan even if these come with 0% interest offers. These will add up and impact your other investments, As a rule, do not spend more than 40-45% of your income on loan repayments. Of this, 25-35% should be for home loan repayment and the rest for other forms of debt, including car and credit card loan.
Personal loan is one of the most expensive forms of loan after credit cards and charges 20-24% interest per annum. Avoid these at all cost. EMIs for a home loan are big and a long-term commitment. So you need to be sure of your earning capacity on a sustained basis, otherwise it will turn into a liability that will impact all your other goals.
Young working ladies Remember, “People say that money is not the key to happiness, but I always figured , if you have enough money, you can have a key made.“
