How your approach to money management should differ per job/profession

TomorrowMakers ™

How your approach to money management should differ per job/profession

01 December 2016
Do you find yourself struggling with managing your income? You may need to revise your investments based on your job.
 
 

What is the secret to a happy and stress-free life? A loving family? A meaningful job? Good health? Well, smart money management is certainly essential if you wish to lead a happy life without any financial worries. Here is how you should alter your money management strategy depending on your profession.

A salaried individual

Strengths

  • Certainty of income that is credited month after month without any delays
  • Tax deduction at source, facilitates easier tax planning
  • Scope for earning more through annual increments, bonuses, and variably pay component

Risks

  • Limited tax planning options for high salary earners.
  • Fixed income means managing unexpected expenses can be a challenge.
  • Wealth creation may be tough if salary increments do not match rising inflation and tax liability

Related: Components of your salary and their tax benefits [Infographic]

Money Management Tips

  • Use the certainty of income to your advantage. Systematic savings of 30-40% of take home salary can make a huge difference over the long run.
  • Have a fixed amount of cash or ultra-liquid investments and adequate protection cover in life insurance, health insurance, disability cover and child insurance plans to protect your family and your finances from emergencies.
  • Monthly payment insurance plans generally charge a higher premium as they include modal factor. You can invest an equivalent amount monthly and use the same to switch to annual premium, thereby saving on the premium and at the same time earning returns from monthly investment

For example. Let’s say you pay Rs. 12,000 as annual premium in monthly mode i.e. Rs. 1000 per month. Instead of that, every month, put Rs. 1000 into say, a Recurring Deposit. At the end of 12 months when you break it, you have earned some interest, say, Rs. 800. Now, pay Rs. 11,000 as your premium in annual mode (it is always lower) and thereby save around Rs. 1,800.

  • Be aggressive when you are young by investing in equities through SIPs. You can also consider ULIPs for a combination of investment and protection.
  • In case you get a bonus at work or a pay-out of your salary’s variable component, you can use that money in a few different ways:
    • Pay off debts
    • Start an emergency fund that is separate from savings and investment and should only be accessed if no other option is available
    • Start an investment fund for a major purchase such as a car or a home or world travel, that you can start with small regular investments
  • It’s a general tendency to keep pulling out money from savings whenever an “important” event comes up. Have different investments for different financial goals to ensure you do not use savings meant for a different objective

Related: Five essential things to consider when choosing a ULIP

A business owner

Strengths

  • Opportunity to maximise income
  • Deductible business expenses offer flexibility in tax planning
  • Option to diversify into different businesses to reduce risk of losses

Risks

  • Risk of unlimited losses is always present.
  • Erratic cash flow makes financial planning tougher. 
  • Impossible to avoid debt, which can eat up the savings during tough times.

Money Management Tips

  • Consider single-premium policies to secure family’s financial future, thereby productively using large one time payments
  • Avoid personal debt like credit cards or personal loans to the maximum extent possible.
  • Use business profits to pay a higher down payment on home and vehicle loans to reduce recurring liability.
  • Plan for commitments like children’s education and marriage through endowment and money back plans.
  • Retain profits and invest in mutual funds through regular purchases even if a formal SIP is not possible.
  • Explore investment options that give you a regular income, such as real estate, wherein you can get rent. In case you’re wondering which is better- real estate or a safe, stable investment like Gold, check out Real estate vs gold- The Face Off [Infographic]

Related: Short term investment options for high returns

A startup founder

Strengths

  • With the right idea and strategy, one can become a millionaire in a matter of just a few years or less.
  • Emphasis on innovative use of technology means the business can be set up with very little debt and low capital.

Related: Budgeting, Bootstrapping and Bartering- The best money saving tips for startups

Risks

  • High risk of failures due to lack of experience, unproven business model, and ultra-competitive environment.
  • Always the risk of a new technology development or development in general rendering the business obsolete.
  • Managing responsibilities and commitments can be extremely difficult.

Money Management Tips

  • Balance the risk of failure of the startup by having your spouse opt for job with fixed income.
  • Watch your costs very carefully. Work-from-home employees can help you avoid office rent and other establishment costs.
  • Prioritize your savings and investments over everything else. When you receive funding, or start earning profits, replenish your investments first before spending the money for anything else.

Related: Lessons From Failure: 5 Things That Make Or Break Startups

No matter what you do for a living, the only way to lead a financially stable life is to have a plan in mind. So, chalk out a plan that takes into account the advantages and disadvantages of your profession and you will be good to go.

 
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