The first job marks the beginning of a new phase of life – becoming financially independent. You have just made the leap from pocket money to earning your own money.
It is a new high and you are free to use your money the way you wish without worrying about the ‘hard-earned money’ gibe by parents.
The first salary wipes out within a week of getting credited, and you have just managed to get some gifts for your loved ones and treat your friends and family. The second salary goes into pampering yourself. It is well deserved, given all those years of rigorous studies and hard work that have brought you here.
In six months, you get used to your earning-spending routine. Now, is the time, if not earlier, to begin financial planning, i.e., learning how to manage your money and developing healthy financial habits.
Good health and adequate wealth are the two essentials for a happy life. And hence it is crucial to develop good habits that contribute to both these dimensions.
An early start in financial planning helps foster healthy financial habits and gives your investments the power of time, which can deliver exponential growth. To begin is half the work done. Rightly so, because most of the time, we don’t know where or how to begin.
So here are five essential rules to help you make a start:
Have a plan
‘Failing to Plan is Planning to Fail’ - a saying that emphasises the importance of planning like no other. Planning provides direction, helps make decisions and encourages action. When you begin financial planning early in life, you have time to take investment risks, learn from probable failures, and gain from the power of compounding.
Save first
‘Do not save what is left after spending but spend what is left after saving.’ This rather famous quote from Warren Buffett, one of the most successful investors of all time, is worth treasuring as a guiding principle for life. It is easy to go overboard with expenses when you have just started earning and a thousand things are calling for attention. Following the ‘Saving First’ rule helps you stay in control of your finances and steer away from unnecessary expenses.
Avoid getting into a debt trap
Getting into a debt trap is worse than spending all your savings. A debt ensues when you buy first and pay later.
For example, you use your credit card to buy an iPhone worth Rs 1,00,000 and pay for it in EMIs over the next 12 months. You might be super excited about the discount you managed by paying through a particular bank’s credit card but are unaware of the interest you might end up paying if you miss even one instalment.
If for whatever reason you are unable to pay back the money borrowed for a prolonged period, the debt keeps increasing with interest charges, late payment fees, etc. If you cannot clear the debt with your limited earnings, you either keep pushing it or take another debt to pay the first.
Either way, you fall prey to the debt trap and coming out of it can be a huge struggle, not to mention the financial setback it causes.
Don’t just save money, invest it
Just saving money will not take you anywhere because inflation erodes the value of money over time. For example, you save money every month but keep it in a savings account wherein it earns 3% interest per annum. But the rate of inflation is 6%. So, theoretically, if an item cost you Rs 100 a year back, it will cost you Rs 106 now. The Rs 100 you saved last year has now become Rs 103 with interest earned, but you are in a deficit because of the rising cost of living. Hence, it is essential to ‘invest’ money, i.e, make your money earn more money to beat inflation.
The good news is that many financial instruments are available to help you invest as per your needs and risk appetite.
Invest early in life insurance
Life insurance is essential to financially secure your future and protect your loved ones from any unfortunate circumstances. Buying a term policy early in life would need you to pay a premium of ‘x’ amount, while the same policy in 5-10 years’ time would cost you a premium of ‘2x’ or even ‘3x’ amount. By investing in a policy at a young age, you would be able to purchase a bigger life cover at a lower premium which would permit you to have a surplus amount to spend on necessary requirements at a later date. If you manage your health, money and emotions, you can truly live a happy and life.
(The writer is Chief Marketing Officer and Head of Products, Ageas Federal Life Insurance)