A popular choice for graduates nowadays is to work for a few years, study for and crack the exam of their choosing, then take a break for a post-graduation course. Whether that’s the route you want to take or not, the aim is to get an early start on good financial habits.
The best way to do this is by making the most of the first salary you earn, however meagre it may seem. So, here are a few tips to get a start on saving early, and profit from the compounding effect of your initial investments.
Set up ECS instructions for your investments: Whether you pick one or two mutual funds, or a recurring bank deposit, ensure the amounts are swept out of your account soon after pay-day via ECS (Electronic Clearing Service), or Standing Instructions. Remember, if it’s not in your account, you won’t spend it.
Resist the temptation of credit cards: Credit cards are great if you’re disciplined, so until you’ve had some time to find out what kind of spender you are, postpone getting one. If you fall under the category of careful spenders and prompt payers, then a well-chosen credit card can earn you good benefits over time. Additionally, you should maintain a good credit score, as it all goes on your track record and can affect other financial aspects of your life.
Start small in stocks: Your 20s are a great time to test your skills in the equities market. Your life is presently free of major responsibilities like healthcare, children’s education, home loans etc. This makes it a good time to experiment in the stock market, and understand if you have the aptitude and interest to stay invested in equities, and profit from its high risk/high reward culture. Early exposure will also help sharpen your understanding of business news, since you train yourself to read stories for their earnings impact.
Set up entry-level insurance plans: While it may seem unreasonably early to invest in either life or health insurance, take advantage of the lower premiums offered at your age and get both. As your age and salary increases, timely top-ups will ensure that your cover grows to match your life-stage needs. Ask your advisor about benefits such as no-claim bonuses, and the premium difference between starting now as opposed to starting the policies in your 30s.
Hassle-free SIPs: If the stock market seems time-consuming and complex, mutual fund SIPs are an ideal alternative, without the bother of constantly tracking numbers. SIPs allow your money to multiply over the long term via the concept of rupee-cost averaging. This means that if the market is down, your SIP instalment will bring you more units at a lower price. And when the market is up, your purchased units are worth more than your cost price.
These early investments may seem like they’ll eat into your time and salary, at the expense of your entertainment and living budget. But it’s best to decide on an amount (at least 15% of your salary), and set it aside for savings and investments. It’s easy to plan your life around friends, travel and entertainment, but these investments will set you apart from others when the need arises. A little saved now can go a long way later.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment, insurance, tax or legal advice. You are encouraged to separately obtain independent advice when making decisions in these areas.
While credit cards come with a host of benefits, they must be used carefully, and never in these situations!