Do you remember your age when you received your first pay cheque or the first gadget that you had bought with your salary? The regular salary getting credited to your bank account makes you feel no less than a responsible adult who now does not have to depend on elders in the family to bear your expenses. That’s a cool, unmissable feeling of being able to show off your richly acquired wealth, no matter how small it may be. In the humdrum of earning, spending and showing off your salary, did you take out time to plan how much you want to save and invest?
Started earning? Why wait when you can commence investments with first paycheck
The transition from fiscal dependence to financial independence can set in motion your confidence to achieve what you had set out to. This is especially true if you have started earning quite early in life. All that hard work and months of slogging for competitive examinations have certainly paid off and you are in a position wherein you see yourself gradually treading on the road to being financially independent and self-sufficient consequently.
However, this still may not usher the much-needed maturity to allocate a part of your earnings to certain financial instruments depending on your financial goals. High on confidence coupled with a carefree attitude, Gen Z loves to spend or maybe overspend by relying on credit cards and personal loans to make payments. However, if the same behaviour is curbed, it can help you to grow your wealth within a few years.
What should you do?
You just do not jump to put your money in random investment options. Instead, you must focus on saving first and then investing. To save, you must first rewrite the archaic equation taught to us
Earnings – Expenses = Savings
Your brain must instead be wired to the new equation
Earnings – Savings = Expenses
A little bit of tweaking the first equation and replacing the variables on either side of it makes you realize how your decision to save must always override your urge to spend.
Make sure that you do not take home more than 20 per cent of your salary. Every cent matters; every rupee counts. It is this fundamental rule that will keep you sane when it comes to saving enough for your future. Now that you have learned the art of adequate savings, the next best step would be to master this art by diverting your savings to investments that will help your money grow.
Being aware of your financial goals
Decide your financial goals first. You must be aware of how much money you would like to save or see in hand at every crucial step of your life, be it marriage, planned parenthood, buying a house, children’s schooling and higher education, and finally retirement. While planning for so many events in life may seem a bit stretched, adhering diligently to your plan will make way for a safer and secure tomorrow. This will help you to decide on your investment plans, which means that you can decide between equity investments, debt funds, fixed-income plans, gold and real estate accordingly.
Now that your first salary is credited to your account, you can plan from among the following investments in the order you prefer.
- Public Provident Fund(PPF): This is one investment opportunity that all personal finance managers endorse. An investment option that earns guaranteed returns of 7.1 per cent while helping you save on taxes under Section 80C of the Income Tax Act, 1961 is a great way to start your investment journey. This scheme comes with a lock-in period of 15 years, though you are occasionally allowed to withdraw your money subject to certain conditions. A great way to park your money in a guaranteed income instrument and stay invested for a prolonged period for investors who must put in at least ₹5000 per year but must not invest more than ₹1.5 lakh in any financial year.
- Equity mutual funds: Have you heard asset management companies screaming “Mutual Funds Sahi Hai”? While you may crib at the volatility of the stock market that causes many people to suffer notional losses or real losses depending on how and when they buy and sell, early and continued investing in mutual funds allows you to benefit from the compounding effect. The result is the accumulation of a huge corpus that not only beats inflation but also allows you to earn handsome returns on your investments. You may start parking your earnings through systematic investment plans (SIPs) to continue your investments in small bits. Small investments made continuously for a decade or more help you earn returns not only on the investments made but also on the returns earned.
- Liquid funds: Many people invest in short-term debt funds that maturity between one and three years. While these serve as tax-efficient instruments, especially, for those earning in the higher tax brackets, these funds cannot be redeemed at too much of a short notice. Also, what if you are in sudden need of money to pay for an emergency? Redeeming mutual funds or the PPF would be a costly mistake considering how much you would lose on your investments and the amount that you would have to shell out as exit costs. Therefore, putting money in liquid funds that invests for short periods and allows you to withdraw from them can be a great help. Apart, these funds invest in government securities, treasury bills and bonds, thus, ensuring you a fixed income as opposed to most equity fund investors who lose their sleep over market volatility.
- Health insurance: No matter how much you save, all your money will be wiped out in paying for hospital bills or meeting treatment expenses. To save your money from such unforeseen and unwanted expenses, you must invest in a health insurance plan. Many people misconceive health insurance as an added expense not realizing how an adequate health insurance policy bought at nominal premiums today can help you get access to ensuring the best treatment at minimal costs tomorrow.
- Gold investments: Gold as an investment acts as the perfect hedge against inflation. The shine and sheen of gold have attracted many to queue up at banks to buy sovereign gold bonds (SGBs) or open Demat accounts to invest in either these bonds or gold exchange-traded funds (ETFs). The lock-in period in SGB is eight years, though you can redeem the same after five years. You can redeem your gold ETFs on any day during the market hours. Your earnings from gold ETFs would depend on the volume and liquidity of the ETFs you have invested in.
Though gold as an investment never disappoints, you must invest not more than five to 10 per cent of your earnings in them. Moreover, you must aim at parking your investments in digital gold as opposed to hoarding physical gold that many investors mistakenly do. Apart from shielding you against the tumultuous market movement and the deep-rooted effect of inflation, investing in gold also helps you to diversify your funds. Inflationary pressures are conducive to growth in gold prices, which means that investing in gold now can earn you massively good returns in the near future.
- Bank deposits: True to word, keeping money tied up in fixed deposits and recurring deposits does more harm than good owing to the low-interest rates earned coupled with the impact of taxation that results in these investments earning you either negligible or negative returns. However, you cannot discount the fact that you may have to suddenly arrange for funds at an hour’s notice, which is possible only with these investment options.
- Real estate investments: It may not be advisable to incur a home loan early in life considering the huge liability to repay involved. However, it makes sense to buy a property with the intent of earning rental income. While you spend a part of your income to repay your debt, you can also use the income earned from rent to prepay your loan occasionally, thus, relieving you from the burden of repaying the loan and getting rid of the loan much ahead of the predetermined loan tenure. So, a real-estate investment made with the intent to earn and include it as an added source of income ensures a fixed asset in future that gives you a guaranteed source of income.
Also, if you have bought the property using a home loan from a bank or a non-banking financial company, you can easily claim tax deductions up to ₹2 lakh on the interest component of the loan being repaid under Section 24 of the Income Tax Act, 1961. However, for let-out property, there is no upper limit for claiming interest deduction. Similarly, you can claim up to ₹1.5 lakh on the principal component of the equated monthly instalment (EMI) on the loan being paid every month.
You are young and vivacious with more than four decades of time ahead of you to stay invested. The benefit of starting young is that you realize how to value your money early in life. It may be easy to earn, it is easier to spend but it is equally difficult to save enough unless you are careful with how you use or spend your money.
Not that we ask you to be a penny pincher, but it would do a lot of good to you if you could be penny-wise. Also, when you are young, you can resort to a secondary source of income, thus, giving you more access to money for savings and investments. Being young, you are more likely to take risks, which is why you will not mind putting money in equity mutual fund instruments fraught with market risks but also earn returns much beyond investors’ thinking.
How much should you invest?
This is an important question that has no definite answer. A lot depends on your financial goals, your current financial status and the responsibilities back at home. However, it would serve best if you would allocate at least 60-70 per cent of your income to mutual fund investments.
Regular investments in gold ETFs or SGBs when the price of gold is low for the coming 10-15 years allow you to earn enough from the rice in gold prices. Refrain from putting money in physical gold as it involves too much hassle in storing and securing the same. Considering it is an expensive commodity, you might end up paying extra towards acquiring a secure space such as a locker at home or in a bank. Apart from the market risks involved, gold ETFs and SGBs do not carry any other risk associated with buying and holding physical gold.
Property prices have not skyrocketed in the past few years, which means that you still have enough opportunity to invest in a residential or commercial property that will lend you an additional source of income. Investing today to earn tomorrow should be your guiding mantra.
Debt funds and fixed income instruments come low in the list though you cannot rule out their significance in your investment portfolio.
Do not forget insurance as this is an essential step that you must take towards ensuring the security and well-being of your family. If you are in a job that involves risk or threat to life, make way for a life insurance policy too in your portfolio so that you do not upset yourself with constant feelings of being unable to financially secure your loved ones.