Here is a money management action plan for young earners fresh out of college.
- 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.
- Get life insurance (15-20 times your annual income) if your parents are not well off. After you get married, you can change the nomination share if you like.
- Get health insurance for parents (if not present). Get a separate health cover for yourself.
- Opt for the new tax regime so you will not be distracted by tax-saving products”.
- 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 three 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. If you have a surplus, your goal should be to find this balance.
- When all this is done, find 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. Do not touch this amount if you invest Rs. 5000 in fixed income and Rs. 5000 in a Nifty 50 or Sensex index fund. Find a space in your salary to accommodate stock investing.
- Increase your investments by at least 10% yearly – this is the key to wealth.
- Have a long-term view when it comes to building wealth. Do not worry about short-term market movements.
- Focus on enhancing your skills and income. Think long term for your income
- 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.
- Do not waste too much on discounts, cash-backs, reward points etc. They can give you some pleasure, but your aim is happiness and contentment (NB: I did not say to avoid them!)
- Do nothing for at least one hour a day: nothing. This is when ideas are born.
- Optimize time. Time management makes up for (self-perceived) lack of genius or intellect! At the cost of repeating myself, time is real wealth.
- Look at your investment once a year (just to see if it is still there!)
- Do not add any more investments. There will be new products each month. Fear of missing out can destroy a portfolio. You should fear missing out on productivity, not products.
- Inertia (doing nothing) before you start investing is bad but inertia, after you start investing with a plan, is golden!
- Create a cash flow chart in Excel. In 2023, I can invest Rs. 5000 a month. In 2024 I will invest 10% more: Rs. 5500. by 2031, I should be investing more than Rs. 111,000. I should double the amount I invest every seven years or less.
- Track religiously the investments made each month (the investment made, not their value!)
- Focus on your health and fitness. Do not allow job stress to reflect on your eating habits. If you need to hang out with colleagues or spend time in meetings, be careful about what you eat! See: Warning, you could be the next diabetic! Simple steps to prevent, manage and even reverse diabetes.
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