What Will You Do With Your First Salary?

My Dear Fellow Young Indians,

Welcome! Welcome To The World! The "REAL" World! Now, that you are done with your studies, and are looking forward to entering the "JOB MARKET", you must be having hundreds of plans...plans about the first salary and what will you do with it...

May be you will be buying that i-phone, or a new sports bike...or branded jewellery or simply give it to parents / donate it...depends. All of us have plans of what we will do with that first salary.

Here, I have some piece of advice (unsolicited, but useful, mind you) for all of you. Please read this blog thoroughly and reflect upon your plan to spend that first salary. If this piece of text can help you take a better informed decision, nothing like that.

Here are my suggestions of what you should do with your first salary (not literary speaking the first -- I am trying to refer to your earnings in your first six months' to one year of career).

1. Get a Term Plan: Life is precious. It is impossible to derive any monetary value of one's life. But still, we ought to agree that, the same life is equally uncertain. While we all wish for a healthy and wealthy life forever, things may go completely wrong at times.

In case something goes terribly wrong with your life, the first line of defense against that (for the people who will be depending on your earning) will be that term insurance. A "pure vanilla" life insurance plan. A term insurance is a life insurance alike any other general insurance (e.g. car insurance). You pay a small sum for a large sum assured against your life. You lose that money (except the deduction you can get under Income Tax) if you do not die! Simple! Compared to the pathetic "endowment plans" that your dear LIC agent will force you to buy, a term plan is cheap (economical), simple and it does what an insurance policy is supposed to do -- provide insurance cover.

While we do not complain about not getting any returns on the premium that we pay for our car insurance, it is somehow not clear why want some sort of return on the life insurance premium we pay. Endowment plans rarely offer more return than 5% to 6%. Plus, they fail to provide adequate life cover.

So, it is better to go for a term insurance plan and the money that you would save on its low premium may be invested in any savings scheme.

You can buy e-term insurance plan to save the cost of premium.

2. Create that "Emergency Fund": As a thumb rule, you MUST have SIX MONTHS' SALARY as FD in banks to meet any eventuality like loss of your job. Such "buffer" funds must not be utilized for any purpose other than most emergency situations. It would be better to add some more money to your buffer fund every year (with subsequent rise in your salary).

3. Get a Health Insurance: Even if your employer provides you a health insurance. it is advisable to get a good health insurance, with sufficient cover. In today's times, minimum cover should be around 8 to 10 lakh rupees, though this figure will depend on an individual's life style, age, existing disease etc.

But, getting a term insurance and a health insurance at a young age will mean that you will have to pay less premium too.

4. Start Making a Diversified Portfolio of Investment: If you look at the Indian cricket team, on one side we have players like Virender Sehwag or Shikar Dhawan, who will try and accelerate the run rate. On the other side, we have players like Rahul Dravid of Pujara, who provide stability to the batting line up. Some are all rounders who can fit multiple roles, some are fast bowlers, and some are spinners.

The same way, your investment must have instruments that serve different purpose. For example, if you invest in stock market (directly or through mutual fund), the small cap funds will act like Sehwag, which may help you get excellent returns in long run (of course, they are risky and volatile). On the other hand, something like PPF will act like a Rahul Dravid -- giving predicable stability to your portfolio.

Also avoid investing too much in one type of instrument -- like gold, real estate, equity and so on. You must put your eggs into different baskets to avoid risk.

The best way is to get professional help of a CERTIFIED FINANCIAL ADVISOR (by paying fees) to get your financial plan ready, based on your goals. Goal based financial plans will allow you to stick to your mandate of investment in long run. Such planners will also help you take corrective action if you deviate from your plan. Please note that the money spent on the fees of such planners are investment and not waste of money (as many of your friends may tell you).

5. Avoid buying an expensive car and home at an early age: The conventional wisdom is to buy a house by getting a home loan. As there is (somewhat wrong) notion that real estate does give extra ordinary returns in the long run. Even if we assume this belief to be true, the problem is that buying a house is a big financial commitment. It requires years of planning and exceptional capacity to pay EMIs. If you want to buy a house, do not buy before the age of 30. You can invest in equity mutual funds for seven to ten years to create a corpus.

Plus, in India, buying a house is a tough task -- heavy documentation, unprofessional builder behaviour, late possession means you must be mature enough to tackle such daunting challenges.

One more problem with real estate investment is that it is not very liquid either. Ideally, you should have only one house, in which you will be living. Rest of the money should be invested in other financial instrument.

6. Beat the Inflation: Even if we assume the inflation to stay around 6%, the investments avenues like FD etc. do not beat the inflation and the "real" value of your savings vanish over a period of time. To beat the inflation, you can take exposure of equity. If you have enough time and skills, you can invest in shares directly. Though, the better way to go through the Mutual Fund route.

Equity is risky-- but as they say -- no risk no return. And the biggest risk is not taking any risk at all.

Based on your risk appetite, you can invest in equity using SIPs. The power of compounding will work more if you start early.

7. Get a Credit Card (DANGEROUS if you do not handle it with care): Warren Buffet does not have a credit card and he does not want the youth to have one either. He is right, at least, partially. It is because if you fail to pay dues on credit card, the interest charged may be around 3 to 4% (only??? -- well, it is 3 to 4% PER MONTH!!!-- meaning 36 to 48% PER YEAR!!!)

But, using credit card well will improve your CIBIL credit score and it will allow you to get better loans in future. A good credit score will help you in getting a good job down the line--as more and more employers now check credit history of the applicants too.

Plus, credit cards also provide handy cash back too. But, do not get one credit card if you cannot control your shopping spree!

8. Last but not the least -- PAMPER YOURSELF: Keep aside 10% of your salary for pampering yourself.You are young and you also want to enjoy. So, eat out, do some shopping, go for long rides.

The last nail in the coffin is: Old equation -- Savings = Earnings - Expenditure. New equation -- Expenditure = Earnings - Savings! (The equation is not my original thinking -- I read it in some article like this only)

I hope it was a useful article.

Please do share feedback on pvariya@gmail.com. Cheers!




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