Chinmaya IAS Academy – Current Affairs Chinmaya IAS Academy – Current Affairs
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When you get your first salary, it’s time to apply your mind towards choosing the right savings option for a better life You’ve bagged a plum offer and salary credits from your employer have just begun to fatten up your bank balance. What should your first steps be, in the world of investing? Here’s a game-plan:
Save before you spend
Getting your hands on your own money is a thrilling experience. Here, finally, is your chance to splurge on all those cool gadgets, clothes and vacations that you’ve always coveted. But once you let the shopaholic in you break free, you may find that there’s very little left at the month-end to invest. That’s why it is important to commit to fixed savings from your income at the beginning of every month, before you begin spending. Start with saving 10% or 15% of your monthly pay, ramping it up to 20% or 25% as your pay increases. If your employer offers an Employee’s Provident Fund account, there will be an automatic deduction out of your pay every month towards your retirement, which also counts towards your tax breaks under Section 80C. But equity investments are a must at this age to create long-term wealth. Therefore, you must supplement this by starting a Systematic Investment Plan (SIP) in a multicap fund or tax saving fund (ELSS) depending on the room for 80C savings. If you don’t know how to choose a fund, opt for equal SIPs in a Nifty50 and Nifty Next50 index fund. If your employer doesn’t offer EPF, open a Public Provident Fund account with a bank and invest Rs. 1.5 lakh a year towards 80C. Supplement this with equity fund SIPs. Ensure that your SIP dates fall in the first week of the month. Always spread your investments over 3-4 options to diversify risk. Many folks of the earlier generation signed up for 10- or 15-year endowment plans from insurers as soon as they got their first pay cheque. This is imprudent, as such plans yield measly returns after locking you into rigid monthly pay-outs for much of your working life. As a newbie investor, it is best to separate your insurance from your investments. Before signing up for insurance cover, evaluate your life goals. If you’re a family person, a generous, pure-term policy that covers 20 years’ living expenses is critical to take care of your dependents in case of your death. If you are footloose and single, there’s no point in buying a life cover. Instead, sign up for critical illness, personal accident or health insurance plans that will help you tide over acts of God or personal misfortunes during your working life. Buying property at a very early stage in your career can be damaging to your finances on three counts. One, the burden of a monthly EMI robs you of the ability to spend freely on your other lifestyle needs. Two, owning a home in a specific city will hamper your mobility in seeking out better career opportunities elsewhere. Rental incomes in India amount to a small fraction of home loan EMIs. Paying an EMI on a property you aren’t going to live in and incurring rent in another city is doubly debilitating. A home bought in your twenties may also be in a state of disrepair by the time you are ready to retire. Three, EMIs rob you of savings potential during the best years of your working life, reducing your ability to create wealth outside of that one piece of property. A Rs. 50 lakh home loan today (8.6% interest) locks you into an EMI of Rs. 49,400 for 15 years. By the time you’re done with it, you would have paid the bank an interest of Rs. 39 lakh on the top of the principal amount of Rs. 50 lakh! The goals you list out can range from buying a MacBook Air next year, to a European sojourn in three years’ time, to retiring early. Setting out specific goals with time-frames also helps you decide on appropriate investment vehicles. For goals up to four years, you must stick to safe vehicles such as RDs or debt fund SIPs. For 5-to 7-year goals, PPF/SIPs in hybrid mutual funds can work. Equity funds should be considered only for goals that are over 7 years away, to give your portfolio time to recoup from market ups and downs. Your goals need not be cast in stone and can always be rejigged as you go along.
