At 21 my salary is too much! How should I invest?

Published: October 5, 2020 at 12:45 pm

Last Updated on October 5, 2020 at 12:53 pm

Here is an interesting question from a young earner about to start his career: Dear Sir,
I started following your work recently. I am 21 years old now and will graduate with a BCA degree this month. My internship is getting converted to full-time next month. I will be working as a Front End Developer at a startup in Bangalore. My salary is 7.2 LPA.

I am a bit scared as I feel this is a lot of money as I used to spend less than 1000 rupees while I was in college. I want to know where to invest my money. Should I do SIPs or should I invest money in stocks? Which funds and stocks to choose? If I should do SIPs should I do weekly or monthly? Your thoughts on this would be very much appreciated.

Let me start by stating the obvious: When this article gets shared on social media, you are likely to see comments (often without reading the article), that go, “give me the extra money and I will show you how to spend it!”. After disposing of such display of extraordinary intellect, let us consider the problem at hand objectively.

First of all, even to find a teenager who spends less than Rs. 1000 a month today is rare – you are indeed rare! Let me, however, caution you that expenses will increase with age – some because of colleagues, some because of relatives and perhaps because we might tend to think: “we have arrived at the next level in life, so let us spend and borrow in accordance”.

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Soon that “excess” that you perceive as “too much” will rapidly decline. How long you are able to keep your expenses and borrowings in check will determine your ability to create wealth. Yes, that amount has to be invested prudently but first, there has to be an amount!

Regardless of the gap between income and (expenses + borrowings), the rules of investing are fairly the same – especially at 21! Here is a simple action plan for you. You will have to get yourself a term life insurance plan and health insurance (self + familY) regardless of whether your employer offers these benefits or not.

  1. Use your first paycheck and make your parents and rest of the family happy
  2. Use your second paycheck to get something for yourself (money is there to be spent after all!). Just make sure these are not high-end recurring expenses.
  3. From your first paycheck take 20-30% of your take-home to either another bank account or a liquid fund. This is your emergency stash. You can reduce this allocation after say 18-24 months. Increase it again suitably if you withdraw due to an emergency
  4. Plan for a short-term goal: Maybe a bike, a DSLR, a holiday? Allocate some money from your salary each – just open an RD for 3 months or six months for these. Life is about finding the right balance. When it comes to money the balance is needs, wants savings and investments. Most people cannot find this balance because they do not have a surplus. You do, so better find it!
  5. When all this is done, find out the sum of your investible surplus + mandatory retirement deduction.
    • Investment surplus = income – expenses – EMI
    • mandatory retirement deduction = amount deducted from salary for EPF or NPS etc (if you have this arrangement with your employer)
  6. The total investment made = investible surplus + mandatory retirement deduction. Ensure 50% of total investment is into equity and 50% is in fixed income (EPF or NPS{without equity}, PPF if necessary
  7. For the equity part, start a SIP or invest on your own each month in a NIfty index fund direct plan, growth option. If you want to invest in stocks do it with an extra amount. That is if you are investing Rs. 5000 in fixed income and Rs. 5000 in Nifty 50 index fund, do not touch this amount. Find a space in your salary to accommodate stock investing.
  8. Increase your investments by at least 10% each year – this is the key to wealth.
  9. Focus on enhancing your skills and income. Think long term for your income
  10. There are other steps like portfolio rebalancing, risk management etc. But those can wait a couple of years. You have the most important wealth of all – time. Do not waste an instant of it.

Wish you all the best!


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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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