Many readers write, “We like your content, but you have written so much that it is hard for us to determine which article to read first. Can you provide a quick-start guide for us to start our investment journey the right way?”
The following is a list of steps for young earners. Older readers can also use them by spotting steps they have not yet completed.
The action plan
- Get life insurance (15-20 times annual income)
- Get health insurance for parents (if not present). Get a separate health cover for yourself.
- Build an emergency buffer: if your income is Rs. 25,000. Over the next few months, you should gradually build an initial emergency buffer of about Rs. 1.5L, and then add 5-10% of your monthly income to it. If it depletes due to an emergency, replenish by temporarily stopping investments.
- List your short-term goals: needs or wants you can imagine within the next seven years or so. You can allocate some money for them ( any online goal calculator would do with about 6-7% pre-tax return assumption). Use a bank RD or a liquid fund, an arbitrage fund, or a money market fund for these. For recommendations, see: Handpicked List of Mutual Funds (PlumbLine)
- The rest you have left with you can be allocated towards financial independence. Say Rs. 5000 is left, and say Rs. 3000 is the total EPF/NPS contribution (employee + employer; ignore EPS contribution). Invest Rs. 5000 in a Nifty or Sensex index fund. If you have NPS, opt for 50-70% of gilts (G) and the rest in corporate bonds (C).
This is all the necessary portfolio design! What is more important is to make use of the time you have. Most people think like this in their mid-thirties. So you have a considerable head start. If you take a long-term view, you could achieve financial independence in about two decades.
Addition steps (with some repetition from above!)
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- Use your first paycheck and make your parents and the rest of the family happy.
- 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.
- Take 20-30% of your take-home from your first paycheck to 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.
- Plan for a short-term goal: Maybe a bike, a DSLR, or 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 made up of needs, wants, savings, and investments. Most people cannot find this balance because they do not have a surplus. You do, so you better find it!
- 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)
- 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
- For the equity part, start a SIP or invest on your own each month in a NIfty index fund direct plan or growth option. If you want to invest in stocks do it with an extra amount. If you are investing Rs. 5000 in fixed income and Rs. 5000 in a Nifty 50 index fund, do not touch this amount. Find a space in your salary to accommodate stock investing.
- Increase your investments by at least 10% annually – this is the key to wealth.
- Focus on enhancing your skills and income. Think long term for your income
- There are other steps, such as 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.
Happy investing!
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About The Author
Dr 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.
Pattu has over 14 years of experience publishing news, analysis, research, and developing financial products. Several of his calculators and a financial health check tool have been published on SEBI's investor awareness website.
M Pattabiraman, editor, Freefincal
He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
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Pattabiraman has co-authored three print books:
(1) You can be rich too with goal-based investing
You can be rich too with goal based investing book cover
Published by CNBC TV18, this book helps you ask the right questions and find the right answers. It also includes nine online calculators, so you can create custom solutions tailored to your lifestyle.
(2) Forget Startups, Join Corporate & Still Live the Rich Life You Want for young earners.
Gamechanger book cover
This book helps young earners get the basics right from the start! It will also help you travel to exotic places at a low cost!
(3) Chinchu Gets a Superpower! for kids.
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of informed decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management.
Feedback from a young reader after reading Chinchu gets a Superpower
Buy the book: Chinchu gets a superpower for your child!
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