How should I invest my pocket money?

I was asked this question in a podcast recently. I am a college student. I receive some pocket money each month. How should I invest it?

First, seeing 18-somethings think about investing a few years before receiving their first paycheck is wonderful. This is personal finance. So there is one right answer. I can think of a couple of ways, but the key is to find a balance between spending and saving/investing.

(1) You can think of something you have always wanted to buy. A mobile phone, a camera etc. and save a portion of the pocket money for that. You could open a recurring deposit (RD) in a bank (an SB account is needed first) for the next year or two and invest the same amount each month. It works like a mutual fund SIP, but the investment is made into a fixed deposit with a fixed return. After the RD matures, you can use the money to fully/partially fund your purchase.

An RD is a wonderful savings tool to help us plan for short-term purchases. We still use it to plan for our kid’s school fees or any expensive annual subscriptions like health insurance premiums. Remember only to save a portion of your pocket money. The rest is for responsible fun.

(2) Another opinion is to start a SIP in a Nifty or Sensex Index fund with a portion of the pocket money. This will set the foundation for your equity portfolio when you start earning. Choosing an index fund eliminates fund manager risk, and you don’t have to worry about fund performance or changes in mutual fund star ratings.

You can always spend, save and invest with your pocket money depending on how much you have to play with.

Soon you will start earning and receive your first paycheck. Here is what you need to do at that point:

1. Use your first paycheck and make your parents and the 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. Take 20-30% of your take-home from your first paycheck 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, or a holiday? Allocate some money from your salary each – open an RD for three 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 you better find it!
5. When all this is done, determine 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 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.
8. Increase your investments by at least 10% annually – 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.

I wish you all the best!