Personal Finance Essentials For Young Earners

I am a ‘zero’ when it comes to personal finance! Where do I start? I would like to change my attitude towards money and my financial status.

If these statements reflects the state of your mind or if you know people who feel that way, here is a list of personal finance essentials to work on.

Credits: This post is based on emails, comments on blog and in facebook group Asan Ideas for Wealth and encouragement from Ms. Charulatha Varadarajan.

Background

When I started my third post-doctoral assignment in a national lab, I was asked to automate (run via computer) a sophisticated instrument for measuring small magnetic fields.

It was a monster of an equipment and I knew nothing about writing code to automate instruments. I had to learn the coding from scratch. I tried reading books on how to master a programming language called ‘labview’.  I thought of attending training sessions for it.

I got nowhere. I decided to learn the language piece by piece. Instead of worrying about basic commands and learning them, I asked myself

What is the first step I need to take in order to operate the instrument?

I knew the answer to that (nothing more than commonsense).

I sought to write code for that step alone. I ignored all the ‘basic lessons in programming’. I had a requirement and I sought a solution for it.

I searched for that online. I soon got an answer.

I then focussed on the next step, wrote an independent piece of code and attached it to the first piece and so on.

By the 3rd or 4th step the skeleton of the code was forming. I also learnt a decent amount of Labview commands that helped me complete future steps fast.

Soon I wrote a decent working code. It was far from optimal but got the job done without crashing the computer.

This experience immensely helped me in life,

  • when I was putting my financial life in order I just followed the same method outlined above,
  • when I started making Excel calculators, I was a zero in Excel. I followed the same method.

In this post, I would like adapt this method to set down a list of personal finance essentials for young earners.

Shut yourself out

Don’t worry about reading books on personal finance, blogs or the business channel. Stay away from all of them.

The answers lie within you! Yes you. You hold the key to  financial control. No one else. Never ever, forget that.

Don’t worry about reading books on personal finance, blogs or the business channel. Stay away from all of them.

The answers lie within you! Yes you. You are the key to your financial control. No one else. Never ever, forget that.

Find yourself a quiet corner

Switch your mobile phone, toss your i-pad or laptop aside. You will need to think about your life. The more you think the more action items you can list.

Solved Examples!

Here are a list of questions for you to think about. This is just get you started. Once you get the hang of it, the questions will form on their own.

  1. Do you have money to handle a sudden expenditure? Say your bike is parked in the road and a truck rams into it. Do you have the cash to repair your bike?
  2. What if you were sitting on the bike when the truck hit you? How will you manage hospital expenses?
  3. What if you did not survive the above accident? How will your dependents manage monthly expenses? How will your children study?
  4. Are you in debt? Owe someone or something(!) money? Pay EMIs for an appliance/gadget? Have a personal loan?
  5. You manage expenses now because you have an income. Years from now, when your income stops, how will you manage?
  6. Do you have a forthcoming ‘major’ expense this year, the next, 5 years from now?

How to get started: Young, unmarried, earner

Activity zero: Do not buy any product for tax-saving! Do not open a PPF account!

Activity 1:  Scrap up all the money you can and put it in a bank account. Take a part of it and open an online fixed deposit. This will be your emergency fund. You will need an amount equal to about 6 times your monthly expenses or more. So don’t stop until then.

Activity 2: Get yourself a mediclaim policy even if your employer offers you one. Ensure you cover your parents also. Get as high a cover as possible and increase it each year. Understand associated tax benefits.

Deadline: 10 days! One week to read about mediclaim policies and 3 days to get yourself one

Activity 3: Resolve to clear your appliance/gadget EMIs, credit card dues, personal loan etc. Scrap up some more money and prepay from time to time.

Activity 4: Start investing in mutual funds. If your total 80C deduction is below the Rs. 1.5 Lakhs limit, aim to invest as much as possible in ELSS mutual funds. Open an account with an AMC and invest as much as possible from time to time. Do not start a SIP in ELSS fund! Need help choosing a mutual fund, read this guide.

  • Do not buy a ULIP
  • Do not buy an endowment policy
  • Do not buy a pension plan
  • Do not buy a child plan
  • Do not talk to your relationship manager!
  • If you complete the above steps, you will not have money in your SB account! So your relationship manager will not talk to you!

Do the above, one after the other. You are sure to feel good about yourself. You could then act on your other requirements, read more etc.

How to get started: Young, married, earner

Activity zero: Do not buy any product for tax-saving! Do not open a PPF account!

Buy yourself a pure term insurance policy online for a sum equal to at least 15 times your annual income. If you can afford more, buy more. Make sure you buy it only for next 20-25 years. That is as close to your retirement age as possible.

Activity 1:  Emergency fund. Same as above

Activity 2:  Mediclaim Policy. Same as above. Include your wife and her dependents if needed.

Activity 3: Get out of bad debt. Same as above

Activity 4:  Mutual Fund investing. Same as above

Activity 5: If you have kids, think about their future needs: education, marriage etc. and how you are going to invest for those.

Read no books until you have completed these basic steps.

Read no blogs/magazines without a purpose.

The questions lie within you.

The answers lie within you.  

Tackle one question at a time. Answer it. Act on it and move on to the next. This post only aims to sort the essential questions in the right order.

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

57 thoughts on “Personal Finance Essentials For Young Earners

  1. Mohit

    Gr8 Advice for young earners 🙂
    I can correlate your automate example with my working style 🙂
    When I started thinking about investment first thing I did was opening the PPF account ( do not know why). When one should open the PPF account or we do not required any PPF account?

    Reply
  2. Mohit

    Gr8 Advice for young earners 🙂
    I can correlate your automate example with my working style 🙂
    When I started thinking about investment first thing I did was opening the PPF account ( do not know why). When one should open the PPF account or we do not required any PPF account?

    Reply
  3. Debojyoti Das

    Nicely summarized Pattu all the basic steps of Investment for any age investors. I wish all of us gets benifit from this. Your example was amazing.

    Reply
  4. Debojyoti Das

    Nicely summarized Pattu all the basic steps of Investment for any age investors. I wish all of us gets benifit from this. Your example was amazing.

    Reply
  5. kuntal

    Hi Pattu
    Writing a blog every day, or every other day!
    Do u think u can hope to be a financial expert by exerting yourself so mush? Chill!!! Take it easy.
    Hope you dont mind!
    Thanks,
    Kuntal.

    Reply
  6. kuntal

    Hi Pattu
    Writing a blog every day, or every other day!
    Do u think u can hope to be a financial expert by exerting yourself so mush? Chill!!! Take it easy.
    Hope you dont mind!
    Thanks,
    Kuntal.

    Reply
      1. Fasil

        Thanks, I m using minimal SIP of 6 months(that's the minimum period allowed by AMC's) and instead of 3 yr lock-in, I m taking it up as 3.5 yrs lock-in 🙂 as this would help me more in Rupee-cost averaging and not timing the market.

        Reply
    1. pattu

      Most people who open a PPF account do so for the wrong reasons. To save tax, max the 1L (now 1.5L). Young earners should be investing most of their money in equities. They do all of the above activities, do goal planning, asset allocation and then open a PPF. What is the hurry?

      Reply
    1. pattu

      Most people who open a PPF account do so for the wrong reasons. To save tax, max the 1L (now 1.5L). Young earners should be investing most of their money in equities. They do all of the above activities, do goal planning, asset allocation and then open a PPF. What is the hurry?

      Reply
  7. Ashal Jauhari

    Knowing yourself is the begining of all WISDOM.

    Problem lies in not knowing that WE do not know about ourselves. People 'll run here and there to know so many things but 'll forget to know about themselves.

    Thanks

    Ashal

    Reply
  8. Ashal Jauhari

    Knowing yourself is the begining of all WISDOM.

    Problem lies in not knowing that WE do not know about ourselves. People 'll run here and there to know so many things but 'll forget to know about themselves.

    Thanks

    Ashal

    Reply
  9. Avadhut

    Dear Sir,

    Absolutely fantastic, useful, something we can act upon immediately!

    I loved the sub-headings as "Activity". Yes, in personal finance knowing is 10% and "Acting" is 90%, to me.

    "If you complete the above steps, you will not have money in your SB account! So your relationship manager will not talk to you!"

    Haha, agreed, 100%!

    For married you suggest - "Buy yourself a pure term insurance policy online for a sum equal to at least 15 times your annual income"

    My questions:

    1. Why 15 times? What's the reasoning?
    2. Pure term insurance is important for unmarried person too as his parents may be dependent on him due to age or bad health. This is my understanding. Please correct me if I'm wrong.

    Thanks,
    Avadhut

    Reply
    1. pattu

      Sorry for the late response, Avadhut.
      Thank you.
      1) 15 times is a simple rule of thumb used by many underwriters determining level of insurability. I read about this many years ago. Forget where.
      2) Yes pure term insurance is also important for unmarried person if parents are not financially well off or have poor health.

      Reply
  10. Sachin Kc

    "Activity 4: Do not start a SIP in ELSS fund! "
    Is it been told in the true sense or negative sense?!!

    Reply
  11. Sachin Kc

    Thnks Pattabiraman Murari sir.
    But for salaried class, those who doent have a lump sum to invest in MF, and especially when 80C has been increased to 1.5 lakhs doesnt it to do a good job?

    Reply
  12. Sachin Kc

    Thanks pattu sir
    It needed a bit of thinking on why not to start SIP in ELSS. thanks for the advise.
    But regarding PPF its not clear for me yet. Can't I start one as a part of retirement planning?

    Reply
    1. pattu

      You can but what is the hurry? Invest as much as possible in ELSS for tax planing. Get used to equity investing first. If you retirement is far away, you can open a PPF account after you have completed the basic steps.

      Reply
  13. Pattabiraman Murari

    Fair enough. I would advocate opening an account with the AMC and investing the money once every few months on market dips. This reduces the lock-in and also trains one to get used to equity.

    Reply
  14. Dharmendra

    Thank u Mr. Pattabiraman Murari for such a wonderful article.....sir, i am a govt. servant, age-30, married, one baby (1.5yr), salary is around 50 k/month,
    sir kindly suggest me on my situation....1.I had already opened up a PPF a/c..2. Have LIC jivan saral...3.Recently invested in SBI MF and in ELSS through SIP ........MY agent/FA misguided me.....sir, what steps should i take to get more financial gain........suggest sm thing for baby..i have no medical plan also....plz

    Reply
  15. Avijit

    I simply don't understand, why don't open ppf account. I am in 20% tax slab. Presently Interest rete is 8.1% plus ppf is in EEE category. Now return from PPF I get is 28.1% (20 +8.1) yearly due to tax benefit, which instrument gives that . Because I believe money saved is money earned. Rest I invest in Equity Mutual Funds. Now it gives me mental satisfaction that I have something s fixed which will not erode with market crashes, in which my mutual funds will. Also money saved from the tax exemption from PPF I invest in mutual fund.

    Reply
    1. AVM

      Avijit, your calculation for return is wrong. Actual return is still 8.1%. However, effective return is 10.125% (8.1%/(1-0.2)) as you are getting an 8.1% return from pre-tax money.

      I.e., To get the same absolute interest amount from the same principal amount but from post-tax funds, you will need a return of 10.125%.

      Assumption being that you are in 20% tax bracket.

      Reply
      1. Avijit Paul

        How? Let's assume that I invest 1 lakh in ppf , that's saves 20k in taxes in a financial year and you get 8.1k as interest . Total money is 28.1k for 1lakh. Then how its 10.125%??? Plz explain

        Reply
      2. freefincal

        I am afraid that sort of calculation makes little sense The amount of tax saved is of little unless it is invested.

        Reply
    2. freefincal

      20% is the tax slab and 8.1% is the interest rate. Apples and oranges cannot be added. A young earner can afford to maximize equity investing and hence I see no flaming hurry to open a PPF acct.

      Reply
      1. Avijit Paul

        I know apples and oranges can't be added. But what is the problem if your getting free oranges for buying apples. Look let me give of my case iam 28 yrs of age. Got job at 25, now I was equally investing in ppf and mutual fund, now what I see is that share market is moving in 28 k ..30k...22k and now 25k ..my mutual fund investment is in red but my ppf account is showing good amount of positive . Now this gives me mental happiness that 1 product is showing result. May be 15 yrs down the line mutual fund beats ppf .but I live in present, present happiness is more important for me. Therefore iam suggesting all young earners should invest in ppf for tax saving then less funds, rest in equity mutual funds as sip. This only my opinion based on personal experience.

        Reply
  16. Giri

    Mr.Pattu sir,
    Hats off to you for giving the best ideas for anyone who wants to start investing in mutual funds.
    I have not ever seen a single person or any portal giving such practical and wonderful guidance to the investors.
    However for investing lump some amount in every few months ,you will have to keep that amount idle in your account waiting for the market to collapse .
    Please guide me as to how this money can be utilised for vacant period.
    Thanks.
    Giri.

    Reply
    1. freefincal

      Thank you. It is only a a few months. You can either leave it in SB acct or use an arbitrage fund (with friendly exit load rules).

      Reply
  17. s venkataraman

    I would like to give one more advise to youngsters.
    From whatever salary you are getting, first keep aside a fixed amount for saving and then spend the remainder.That is 'save first, spend later'. This advise is not mine but given by Robert Kiyosaki, author of 'Rich Dad Poor Dad'. According to him this is a major difference between rich people and poor people. Poor people, he says, spend first and if anything is remaining they use it for saving. That is one reason why people wait till March month for investing for tax purposes.
    Regret nobody gave such advice when we were young.

    Reply
  18. Nishant

    Sir, For Unmarried earner, Activity 4: states Do not start SIP in ELSS!!

    Don't you think doing an SIP in an ELSS Scheme can also be used as a retirement corpus? Dual Advantage!!

    Just a thought which crossed my mind. Would like to hear your views on the same.

    Thanks,
    Nishant

    Reply

Do let us know what you think about the article