Here are 16 immediate steps a person who has just started earning should consider to manage their money better.
Money is there to be spent. There is no point in saving or investing money without enjoying the present. At the same time, we should also invest some of our money to continue enjoying the present in the future.
Therefore, balancing needs and wants, savings, investing, and borrowing is necessary. It will take time to achieve this balance. So, the first is not to rush investing or borrowing.
- You have just finished school + college. It has been a hard grind. So cut yourself some slack. For the first three months, buy experiences that you always wanted (without borrowing). Just set aside 10% of your income in another bank account. This is to handle unexpected expenses only. Set aside 20% for at least 5-12 months if possible.
- For the next three months, buy your parents or siblings experiences they always wanted or would enjoy. For example, they are taken out on a plane ride if they have flown before, etc. Again, without borrowing. Not everyone can do everything. You have to set your expectations well below that of your salary level. Life is tough. Brooding about it or looking at how your friends live it up will not help your situation.
- All this while, you have set aside 10-20% of your income in a separate bank account. Continue doing this. Now list things you want that cannot be obtained from a single month’s salary – a bike, DSLR, an international holiday, etc. Open recurring deposits for these. You can set the maturity date depending on the amount you can spare and the interest rate (a simple RD calculator will help).
- Do not buy any investment or savings products because your parents said so, your relatives said so, or your bank RM said so (btw they are not our RM; they are the bank’s RM).
- If you do not have any dependents, then there is no flaming hurry to buy life insurance. The same applies to health insurance if your employer offers one. Yes, you must buy one for yourself, but it can wait a bit.
- Do not buy any product for “saving tax”. We encourage you to choose the new tax regime and eliminate this tax-saving business entirely.
- The next step is investing for financial freedom. Many young earners ask what is the minimum that they should invest. This depends on their income and expenses. Suppose Rs. 10,000 is the total EPF contribution (employer + employee excluding the EPS contribution). Then invest at least Rs. 10,000 a month.
- If you can manage the above investment target, aim for the next level: If X = monthly expenses (including any expenses your parents or siblings are paying for), invest at least X monthly.
- But invest where? Choose a Nifty or Sensex index fund. See Plumbline Hand-picked mutual funds for recommendations. You can also opt for actively managed funds, but be warned that their performance will fluctuate (but expenses will not!).
- Try to increase your monthly investment by at least 10% each year.
- There is no urgency to get a credit card. It can wait a year or so.
- Do not borrow (that is, get a loan or pay via EMI) to buy consumables like TVs, phones, etc. Ideally, the only one you should get is a home loan, but wait for at least 3-5 years for this. If there is an urgent requirement, you can get a vehicle loan a year after you start earning.
- Stabilise your spending, investing, and emergency funds before getting a loan.
- Note: At any point, your total EMI should not exceed 30-40% of your total take-home income. Along with the EMI, you should still be able to invest 20-30% of your take-home pay.
- Do not waste time increasing your income with “quick-rich schemes” like trading. Focus on improving your skills and, therefore, your income.
- Ignore immediate perks like cash back, reward points and discounts. Have a 25Y, 30Y view of what you wish to achieve and think like a rich person. To understand how to achieve this, see: At 22, how should I design my investment portfolio and invest regularly?