It is important to celebrate when your first paycheck arrives, but is equally important to ensure that you take the time to learn some very important personal finance lessons, so that you can put your salary to work for you and grow a savings corpus.
1. Budgeting
A budget keeps spending under control and ensures monthly expenses are lower than your monthly income. It is very important to understand and monitor your cash flows, i.e. from where the cash comes in and where it goes.
Prepare a budget based on past expenses and predicting the probable future income. Also it is very important to factor in inflation into the budget. If your income exceeds your expenses on a consistent basis, then your financial plan is working for you -- else it is time to revisit the plan.
Making a proper budget will help in ensuring savings and investment are done regularly, as well as keep unnecessary expenses and debt at bay. It is important to check the budget on a weekly and monthly basis to see if your expenses are within the budget or if they have gone over your income. If you are in the green (income is greater than expenses) then your budget is working for you, but if you are in the red (with expenses more than income), then it is time to rationalise costs.
2. Risk cover
Risk cover is a very important and a critical investment; ideally you should have a minimum risk cover of ten times your yearly income, i.e. if your annual income is Rs 10 lakh, then one should have a minimum risk cover of Rs 1 crore.
Other factors such as age, medical condition, etc, also play an important role in deciding the risk cover required, which will ensure the financial stability of your family. Apart from pure life/risk cover one can also consider to go for a health cover, which will be beneficial and take care of expenses related to hospitalisation.
3. Investing
The foundation of financial success lies in good investments. There are various avenues of investing your hard earned money -- be it stocks, mutual funds, real estate, debt, or even in art. Irrespective of the type of investment, one should try investing in those avenues which are best suited for one based on risk appetite. Following a budget will help in ensuring regular savings and investments.
Ideally, one should invest regularly from an early age to benefit from the power of compounding.
It is advisable to invest on a monthly basis (through a systematic investment plan/systematic transfer plan), as this will give you the double benefit of regular investment and compounding as well as negating the possibility of overshooting the budget and hence delaying your savings.
Ideally, one should automate this process to avoid any last minute delays in investing. Automating the investment process by a direct bank transfer to a mutual fund/recurring deposit, etc. will help in ensuring the savings objective is met and it also curtails the number of impulse spends -- keeping you within budget.
4. Tax planning
An important aspect of building wealth is tax planning. One should consult a tax expert to see the best investment and savings avenues through which you can save money on taxes. You can benefit from various schemes offered by the government to save on taxes, for example school tuition fees of children, medical expenses of dependent parents, interest on housing loan and loan for home renovation, etc. are tax deductible over and above the Section 80C limit of Rs 1.5 lakh.
Summary:
- Create a budget and stick with it
- Keep in mind that investments are a must to achieve your goals -- but risk cover should not be forgotten
Make an emergency fund and keep it aside for a rainy day
Illustration: Uttam Ghosh/Rediff.com
Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.
