You have just completed your studies and started your first job. It is a big milestone in your adult life. You now have financial freedom and no longer depend on your parents. However, it is easy to be carried away and hence financial discipline is very important.
There are several financial goals you will have to meet during your lifetime. Some of these are your wedding, family, children’s education, and retirement. You may think you have several years before all these financial goals become reality. However, there is no certainty and starting early is crucial to ensure you have no difficulties in achieving your objectives.
Power of compounding
This is one of the biggest benefits of starting early. The power of compounding enables your returns on investments to earn additional income. As a result, you are able to build a good corpus that may be used to achieve your financial goals. For example, if you start investing INR 5000 per month at an interest rate of 10% at the age of 25 years, you will have a corpus of about INR 1crore when you are in your mid-50s. On the other hand, if you save the same amount when you are 30 years, the corpus reduces to approximately INR 60 lakh.
Here are five tips on how to start saving as soon as you commence working.
Make a budget
The first step is to make a financial budget based on your current and future income and expenditures. It is crucial that you understand your cash flows and monitor these to prevent liquidity issues. An important but often overlooked factor is inflation while preparing the financial budget.
List your financial goals
Once you make a budget, you must list down all your financial goals. These may be marriage, buying a home, starting a family, and retirement. The next step is to differentiate these goals as short, medium, and long-term objectives. This will allow you to determine which financial products are most appropriate to meet your objectives.
Evaluate different investment options
Today, you may choose from a large number of investment options, such as mutual funds, equities, debt, derivatives, fixed deposits (FDs), and many more. It is recommended you analyze and evaluate different options to make informed decisions. When choosing the financial instruments, you need to assess your risk appetite because every product has different risk levels. For example, investing in stocks has the highest risks while FDs offer lower but guaranteed returns.
Automate investment process
To develop investment discipline, it is recommended that you commence a direct bank debit to your chosen mode of investment like a systematic investment plan (SIP). In addition to helping develop discipline, it prevents you from unnecessary splurging ensuring you remain within your financial budget.
A commonly neglected area is insurance coverage. Life is uncertain and to protect you against the uncertainty, insurance coverage becomes important. The recommended coverage is 10 times your annual income. You may choose term plans to avail higher coverage at an affordable premium.
Regular savings are important to build wealth. However, an important aspect of wealth creation is tax planning. It is recommended you that consult an experienced tax planner to understand the best ways to save taxes and maximize your investment returns.
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