It is indeed a proud moment when you get your first pay cheque. The transition from being financially dependent to independent, in fact, makes you confident and fills you with a sense of pride. Moreover, the feeling of attaining the ability to take on future responsibilities further propels you on the growth trajectory.
Having said that, it is often observed that once a regular payment starts getting credited in the bank account on a monthly basis, we tend to get a little careless with expenditure. It is natural to want to experience life on your terms now that you are independent. However, unplanned spending and saving can compromise your financial independence going forward.
Poor financial planning doesn’t necessarily imply that you may run into huge debts; but you just may not have enough savings at hand to independently make major plans that require a significant amount of funds. That is why managing money properly is as important as earning it.
Starting your investments should be one of your first priorities as soon as you start earning. Ideally, you should invest at least 30-35% of your income in the start of your career. The early you start, the better it is for you. But you should take informed investment decisions and avoid financial agents who may mis-sell financial products to you that are neither rewarding nor apt for you.
Here are the five investments you may consider once you get your first pay cheque
A monthly systematic investment plan (SIP) in an equity mutual fund is worth looking at. Once the SIP is registered, the pre-decided amount will be deducted from your account every month on the day you choose. An equity SIP is one of the most convenient ways of creating wealth by investing in stocks through mutual funds in the long run. On an average one can assume to get 15% compounded annual return in the long-term.
Opening a Public Provident Fund (PPF) account with banks or post office is a good way to take exposure to debt assets. With interest rates still among the highest at 7.1% with government backing, PPF is worth looking at. It has a lock-in of 15 years, though partial withdrawals are allowed. Such investments in PPF not only help you create secured long-term wealth; such annual contributions also qualify for tax rebate under Sec 80C of the Income Tax Act. One can invest a maximum of Rs. 1.5 lakh and a minimum of Rs. 500 per year.
It is advisable to take a health insurance cover that protects you from any unexpected health-related expenses. A premium paid for health insurance will eventually prove a big investment decision as it will not dent your pocket and potentially impact your other investments during a medical emergency. More importantly, when you buy it in your 20s, your health insurance premium will be lower compared to buying it in your 30s.
You may consider investing about 5-10% of your monthly investment in dematerialised gold via Gold Mutual Funds, Gold Exchange Traded Funds, and Sovereign Gold Bonds. Investing in demat gold rather than owning physical gold gets you the benefit of a hedge against inflation as well as helps in diversification. Moreover, it is more liquid than physical gold and doesn’t come with wastage or making charges that deplete the value of your investment. Neither does it come with an emotional attachment that makes it additionally difficult to liquidate. With gold prices expected to move higher over the next decade, investment in demat gold is worth considering.
Post your entire monthly expenditure, park the balance savings in a liquid fund rather than keeping the money idle in your bank account. A liquid mutual fund invests in debt and money market instruments for a short-term. Typically, money parked in a liquid fund tends to generate better returns than a banks’ savings account. This way, not only your savings are safe but earn comparatively better interest. You can withdraw the desired amount as per your needs while the rest will remain invested. This way you can also create a readily available emergency fund that can be used in times of crisis.
While deciding upon various investment avenues, a young investor must give importance to asset allocation with a major tilt towards equity-oriented investment instruments. Though there is no thumb rule, it is a good investment approach to ensure your equity investment comprises 60-70% of your overall portfolio. Debt assets can take care of 20-30% while rest should be put into gold. Equity investments typically beat inflation with a wide margin in the long-term. Since a young investor in his early 20s has more than 30 years of working life, they should be more focused on equity investments till the age of 45. Higher equity exposure for over two decades will yield a substantial wealth creation and give the much-needed push to your financial health. So, do not miss the investment bus and start early to reap benefits of serious wealth creation.
(This article is written by Adhil Shetty, CEO, BankBazaar.com)
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