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Start financial planning from day one of the career

Financial planning is as critical when one starts his career as it is later in life. Making goal based investments from the start, controlling expenses, buying sufficient life and health insurance cover, having an emergency corpus and understanding tax aspects are some areas which one should give importance to when he starts his career.

December 16, 2014 / 01:29 PM IST

Smitha Hari

Financial goals, retirement and insurance are not concepts thought of by someone who just starts working. At the beginning of the career, when one is in his first job, he or she thinks more on the lines of buying swanky things and splurging on other luxuries. However, financial planning becomes very important even at this stage of one’s life.

In fact, the earlier one starts saving and investing, the better it is for his return on investment. Besides, due to the effect of compounding, one also needs to save less on a monthly basis to accumulate a corpus compared to someone who starts saving later in life. The risk taking ability is also high in this age, making it possible to invest in high yielding riskier investments. These reasons make it essential to organize one’s financial life right from the start of the career. Here are some financial tips to follow when one starts his career.

Control expenses: When one starts working, there is always a tendency to spend excessively, especially on unnecessary things. One should understand how much can be spent by looking at the income. One should always invest first and only then spend. As Warren Buffett rightly put it, “Don't save what is left after spending; spend what is left after saving”. Make a budget of essential expenses and discretionary expenses, and try to stick within this budget. A budget will also help in understanding why there is a cash crunch, and the expenses which are too high.

Map out goals and plan investments: It is critical for one to make goal based investments. Map goals along with the approximate timeframe to achieve it. Retirement is a critical goal which most youngsters do not take into consideration. However, this is an extremely critical goal, and saving for this from an early date helps in achievement of this goal easily. Take into consideration the inflation factor as this is critical when trying to accumulate a corpus for the goal. Once the goals and the corpus needed at the future date for each of these goals is established, determine the amount that should be saved on a monthly basis. Investing based on goals helps in achieving clarity and financial precision.

Start investing: Investing from the date one gets his first salary should be the mantra. However, this is rarely possible. The earlier one starts to invest, the easier it is to achieve the goals. Further, when one invests, the tendency to spend needlessly is curtailed. Once goals are determined and the investment required per month is understood, one should look at the type of instruments to invest in. Short term investments should be used for short term goals. These should preferably be in debt or safe instruments. One should invest in long term instruments for long term goals. This can be in equity investments. Using long term investments for funding short term goals or vice versa can hamper financial soundness.

Buy a life and health cover: Insurance is another critical aspect of financial planning, which is often neglected. For life insurance, a pure term life cover should always be taken and not an investment linked insurance product. The amount can be determined by understanding the needs of the family in one’s absence. This needs to be constantly reviewed with changing needs of life. Take a health cover for a sufficient amount taking into account the family needs and size. Many a time, people do not take a secondary health cover if they have a group cover from the employer. However, this group cover ceases to exist if one stops working.

Build an emergency corpus: An emergency corpus is used to meet unexpected expenses, which can occur to anyone irrespective of age and other situations. Maintain atleast 6 months of expenses in investments which can be easily liquidated. Remember to take into account fixed monthly payments (like rent or loan EMI payments to bank) when calculating monthly expenses for this purpose.

Understand taxation and minimise tax outflow: It is usually seen that people who have just started working do not bother much about taxation or saving for this purpose. One must also remember to start tax planning activities at the beginning of the financial year, rather than wait till the last minute. It is essential that one understands tax aspects, the provisions under the Income Tax Act which help in reducing tax and use these provisions as much as legally possible to minimize tax outflow. This can help in boosting cash in hand, which can in turn help in increasing investment levels.

Starting out on a career is exciting and also financially satisfying. However, if attention is not given to financial planning and the related aspects, one can be quite directionless financially. Prepare a financial plan, implement the different parts of this plan, reviewing this regularly and sticking to its requirements are absolutely essential.

The author writes on the issues related to the personal finance. She has co-authored two books on Personal Finance and currently associated with GettingYouRich, a Financial Planning firm.

first published: Dec 16, 2014 01:28 pm
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