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 Money lessons for start-up employees

With the uncertainty associated with start-ups, it is imperative that employees get a good hold on their finances

December 02, 2019 / 08:53 AM IST

Working in a start-up can be exhilarating. After all, being part of a team that is working on building something new can be exciting and challenging. However, it leaves little time for one’s personal finances. With the high-salary culture, planning for the future takes a backseat. But with the uncertainty associated with start-ups, it is imperative that employees get a good hold on their finances.

Keep expenses under control

Working for a start-up could mean lower employee benefits and a lot of job uncertainty. In such a situation, keeping expenses under check and budgeting are mandatory. Remember, most start-ups are based in Bangalore, Gurgaon and Mumbai, where the cost of living is high. Keep in mind the 30/30/40 rule on your salary – 30 per cent towards expenses, 30 per cent for loan repayment and 40 per cent directed at savings. High savings keep you prepared for any contingency.

Savings also need to be used to build an emergency fund, which can be used in case of a job loss. Many times, things don’t work out or the start-up is not able to secure funding and the emergency fund will be useful when you are between jobs.  The emergency fund should be able to cover six months of your expenses. You can invest in ultra short duration or low duration debt funds to build the emergency fund.

Getting external medical insurance cover would also be a good idea, to ensure you have continued medical cover irrespective of your employment status.

Making stock options work

A big draw that start-ups have is the employee stock option (ESOP). However, these options don’t come free. You need to understand the way the ESOP scheme works and have a plan to be able to pay for the same. For starters, find out the vesting period of the shares. You need to be prepared for exercising the shares; i.e., actually buy the stocks as per the stock plan. For this, you could keep aside some amount regularly in an ultra-short duration debt fund or low duration debt scheme. In case the company gets acquired or you decide to leave and you are required to exercise the option, you would have a fund to fall back on for the purchase.

Don’t rely on the equity compensation alone for larger financial goals. I see that some individuals tend to go overboard on expenses with the belief that the equity compensation will help them in their other financial goals such as buying a house. Getting an exit is not easy for a start-up and hence you need to plan for your financial goals especially retirement. The ESOPs should be treated as a bonus but not relied upon till one actually exits and converts paper money into actual money.

The younger generation of employees prefer to have more cash in hand versus taking long-term benefits. While this allows them to have extra amounts to spend on lifestyle purchases, having funds accumulated early on for retirement would mean that they would have a sizeable tax-free corpus at retirement.

For example, an SIP (systematic investment plan) of Rs 10000 made every month in an equity fund for the next 25 years will grow to Rs 1.60 crore if the returns are 11 per cent annually.  Even an additional Rs 10,000 invested in EPF (employees’ provident fund) through VPF (voluntary provident fund) will grow to Rs 1 crore in 25 years, assuming an interest rate of 8.65 per cent.

Like the way you would work with experts in other areas, involve a fee-only financial planner to help you draw up a financial plan. Such a plan will give you the direction on how to plan your finances so that you can get the best of your equity compensation and remain prepared for other life events.

(The writer is a Financial Educator, Money Mentor and Founder of Finsafe India)
Mrin Agarwal is a financial educator & a licensed financial advisor with an experience of more than 20 years in wealth management industry. She founded Finsafe, a financial education organisation focused on equipping Indians with strategies to handle their money based on goals, growth, and safety. The company has already impacted 30,000 people over the last 5 years of its journey. She also co-founded Womantra, a financial awareness program for women & working professionals to empower them to be truly financially independent. Before dedicating her expertise towards spreading financial literacy in India, she has served in names like Citibank, Deutsche Bank, Birla Sunlife. She has managed a multi-family office for UHNIs and has an extensive experience in investment advisory and banking services.
first published: Dec 2, 2019 08:53 am