Priyanka one of my Blog reader mailed me a Presentation by SEBI on “Lessons on financial planning for young investors”. This presentation was shared by her college professors who want their students to learn concepts like financial planning, goal setting, savings and investment before earning the first salary. Now Priyanka wanted me to summarize it and guide her, what is to be done as she feels the PPT to be a bit heavy. She said that though she understand that financial goals are important to have, but to start with can I give her some financial planning tips on how to make a start and later on she can work on her goals and get a proper financial planning done .
Priyanka has recently completed her Post graduation in Bio technology and is about to join her first Job next month. This “fast food” and “2 minute’ generation believes in action. They want everything at the speed of 3G. But in managing finances action should be backed by proper learning and this is where our education system lacks, which doesn’t have any provision to teach the basics of money management at any stage of school or college days . This impatient attitude exposes youngsters to mis buying and many missellers take advantage of this. Now is the time they should learn that wealth can’t be generated overnight. I also believe this is very sensitive age and whatever behavior gets developed during this period will stay for long. So youngsters should try and learn the financial aspects impacting their life and should start working on it as soon as they get their first paycheck. I am pointing out some financial planning tips for beginners which I think will help these young investors to give their financial life a kick start.
1. Understand Money’s worth: First and foremost thing that young investors/beginners have to learn is understanding Money’s worth. They should learn that money is what you earn in exchange for your time in some productive pursuit. If you earn Rs 50000/- per month i.e in 25 days or in 200 hours, this means your per hour earning is Rs 250. Whenever you want to spend something somewhere, you just have to see that if that particular thing is worth the time you spent on earning the same. Respect the money, gain financial discipline. Learn How to be good with money.
2. Save 20% of your income: Start with saving atleast 20% of your monthly income. This is very crucial to develop the discipline. Use any instrument – Recurring deposit, Mutual funds SIP, PPF etc. but use it after understanding the pros and cons. Keep it simple but stick to it and never get lured to withdraw this savings. It would be much easy for those who are living with their parents who are taking care of household expenses, but may not be that difficult even for those who have the family expenses responsibility too.
3. Create Emergency fund: Out of the 20% income savings you make every month, first thing you have to do is to accumulate your 3 months income and keep it safe somewhere in liquidable form to manage emergencies like Job loss or health problems. (Read: Keeping emergency fund)
4. Buy adequate insurances: Your savings should be backed up by adequate insurance coverage. If you have financial dependents then go with Life insurance also, otherwise adequate health insurance and accident insurance is very much required even if your employer has covered you under their own sponsored insurance coverage. What is adequate, needs to be calculated, but to start with you may go ahead with 20 times of your annual income for life insurance. (Read : corporate employees should not ignore health insurance)
5. Understand that tax saving is not about buying Insurance Policies: Investing for tax saving is the first place where youngsters start making the mistakes. Almost every new employee I have met feels that tax can be saved only by buying some Insurance policy. Buy insurance policy only to cover the risk and automatically some tax saving will also happen. But don’t buy policies just to save tax. There are many different instruments where you can invest to save tax which you will learn over a period of time, but stay away from Insurance policies. (Read: tax planning tips for youngsters)
6. Track your expenses: I can understand that though important it would not be fair on my part to put the pressure of Budgeting on the new earners. That’s why I just wanted you to start with saving just 20% of your income. But still going forward after few months or years you have to learn this concept and work on it. It’s hard to know how much you could be saving if you don’t know what you are spending. So I advise my friends to track their expenses. Whatever you spend, where ever you spend just note it down. Understand your pattern of expenses. Spend by keeping in mind point no.1 mentioned above. I am sure after some time you yourself starts understanding the importance of spending wisely.
7. Avoid Loans: Having regular inflow in your account will bring along so many loan offers from banks and when you are not sure about your goals and requirements, you will surely get tempted to go overboard and take loans for many not required things. Till the time you don’t get confidence in managing your finances you should not indulge into any kind of loan…be it for a bigger car or apartment. Taking loans at this stage will create long term commitments which permanently commit you to higher spending in the future and can make it harder to deal with uncertainties of life later. and when your financial life has not yet designed you should not fall into this trap. You should know the difference between Good Loans and bad Loans. It is quite understandable that buying those big things from your own income in short span will surely give u “a high” and instant gratification but sooner you learn the fine art of delaying gratification, the sooner you’ll find it easy to keep your finances in order. As I said earlier that this stage of life will design your financial mindset, so there should not be any place of loans in it. Save first and then spend even for your mobile phone or ipad 😉
As they say that “the first thing assured by beginning is the end” and “Well begun is half done”, so i believe once you start following the above mentioned financial planning tips religiously you will also start feeling the same.
I hope the above mentioned financial planning tips will be useful to the beginners. Do keep in mind this is just a start and you should not ignore,the power of structured financial planning. (Read : 5 advantages of personal financial plan)