First income always brings in a sense of joy
and freedom. This joy is shared most of the times by buying gifts for near and
dear ones. Beyond that it becomes a routine spending affair. In the current
days of flourishing e-commerce it is very easy to empty the wallets on
everything that you need and want! It is the wisdom of the ages that anything
in excess is not good. So neither too much spending nor too much saving is
going to get you in your happy space eventually. A balance needs to be arrived
between the two.
For most youngsters this can be a daunting
task. A simple mantra is to adopt an ‘Earn-Save-Spend’ habit, as against the easier
and tempting ‘Earn-Spend-Save’ habit. Be disciplined to save at least 10% of
what is earned. This can increase depending on personal circumstances. For a 22
year old earning Rs.20,000 a month this amounts to a saving of Rs.2,000 a
month.
This saving invested in an instrument giving
about 12% return will grow to Rs.1.84 crore by the time he turns 60. This is
the power of discipline and compounding. To maintain this discipline of regular
investing it is necessary that the investments be automated, else there will be
procrastination. The simplest way to do this is to sign up for systematic
investment plans (SIPs) of mutual funds .
Many youngsters would have education loans
which they would be servicing while in their first jobs. It should be ensured
that they get debt free at the earliest, to start a disciplined saving and
investment plan on a high growth trajectory. Some others would be living
independently and would have rent and living expenses to take care of. Inspite
of these commitments, they should choose the minimum 10% saving habit. It
will not be very tough for them to live within 90% of their income. With this
kind of discipline in place they will find that the spending becomes guilt
free.
Slowly, as liabilities go down and incomes go
up, they should increase the percentage of income that they save and invest.
The aspirations of the younger age group would be to buy a car, a home and some
lifestyle spending. All these would require some amount of upfront payments.
The rest can be arranged through loans. While it is advisable to go for car or
home loans, lifestyle spending should not be supported with borrowed money.
Define
goals and priorities and start systematic investments to achieve these
aspirational goals. There will be lot of patience required to get to the
target. It would also be necessary to prioritize goals, as at this early age,
the income would most likely fall short for meeting all goals. It is only a
matter of increasing the time span that you allow for your goals to be achieved.
The investments that are made initially might be tilted towards one particular
asset class. But as the investments increase over a period of time, asset
allocation must be proper to ensure that all long term goals are met. Exposure
to a single asset class, be it equity, debt or real estate can cause lopsided
portfolios and hinder goal achievement in the long run.
While investments towards goals would be
started from the regular savings, it is necessary to remember to have
protective strategies in place. A major ailment or accident can cause a dent in
the income earning capacity at the same time wipe out all the savings. It is
necessary to opt for health insurance and personal accident insurance.
Today most employers offer health benefits as
a standard part of the employment. But it is also true that pink slips are no
longer uncommon. To avoid a being in such a situation without health cover it
is better to have a personal health cover. A personal accident policy can help
in case of permanent physical damage. If there are parents who are dependent it
would be wise to look for their health insurance covers too. They can be
covered as dependents in the employers health benefit package and in addition
can go in for personal health covers.