Money tips for young professionals

Just made the transition from being a student to an employee? While it is great to be earning, you also need to be responsible with your money. Here are some simple ways to get a head start.

1) Go easy on credit card debt

If you are determined to get your finances in order, the best place to start is by getting rid of credit card debt. It starts off as a convenience, more of a stop-gap arrangement. You pay just the bare minimum amount and walk scot free. But as you well know, or will soon learn, there is no free lunch.

When you use your card, you pay for an item with money that is not yours. So basically you enjoy life on borrowed money. This instant gratification can put you on a slippery slope. Let’s say you could not pay the last bill. You put up the cash for the minimum payment and revolve the balance. The bank says they will charge you interest at just 2.25% per month. What they fail to tell you is that it works out to an obscene 27% p.a. The longer you take to repay it, the more it eats into your disposable income, the more it hinders your savings potential, and the more money the bank makes.

If you have started revolving credit, it means that you could not afford to clear your monthly bill. And, it will not be just the debt that you are servicing. Every single purchase you make on that card will result in the interest rate being levied. The only way out is to stop using your card till your debt is cleared.

2) Get medically insured

Everyone should get themselves a medical insurance policy. Numerous illnesses and accidents are pretty much age agnostic. Should you unfortunately succumb to it or be a victim, your savings could disintegrate rapidly.

Almost certainly, your employer would offer you a medical insurance cover. That is still no reason to bypass getting medically insured on your own. What if you quit your job or get handed the pink slip? That will leave you vulnerable between jobs. Or, you may decide to become a consultant where medical insurance is not part of the package or even move out on your own.

Get insured. The younger you are, the lesser your premium so you won’t even feel the pinch. Existing illnesses are excluded from the cover, so being young with no pre-existing ailments gives you a complete coverage. The greater the number of years that go by without you making a claim, the greater your claim bonus.

Not to mention the tax benefit. You can claim deduction from total income under Section 80D of the Income Tax Act, 1961, against premium paid towards the policy.

3) Start saving

If you have recently joined the workforce, you will probably enjoy the new spending power. But with money also comes responsibility. Though you may want to spend it all, it is the best time to take control of your own financial future.

Set aside a fixed percentage of your salary. Stick to it. Ensure that you save at least 10% of your income every single month. Over time, it will accumulate substantially.

Let’s say you invest Rs 1 lakh to withdraw when you are 70. While invested, it earns a rate of 12% p.a. By delaying your investment by just a few years, you pay a heavy cost. If you are 30 years old when you make the investment, you will be sitting on Rs 1.18 crore by the time you are 70. Wait for just 5 years, which really does not seem long when you take decades into account, and that money will be worth just Rs 65.30 lakh when you get to 70.

The point is, start saving NOW.

4) Start investing

Saving and investing are two very different efforts. Saving is when you do not spend a part of your income but set it aside for future use. Investing is putting that money to work. You cannot create wealth only by saving. You have to invest the savings wisely to create wealth.

Equity offers great potential to convert your savings into wealth. And you can start with very small amounts too. Cut down on your spending by just Rs 1,000/month and invest that amount in an equity mutual fund. Within the next 10 years, you would be patting yourself on the back.

Let’s say you invest Rs 1,000/month over 10 years in a systematic investment plan, or SIP, that returns 12% p.a. You would have invested Rs 1.20 lakh over 10 years and your corpus would be worth Rs 2.30 lakh within a decade.

Now let’s say you go one step further and increase the SIP amount every year by a very affordable Rs 500. You would have ended up investing Rs 3.90 lakh and your corpus would be worth Rs 6.36 lakh over the same time frame.

5) Be sensible with your tax planning

Tax planning is more than Section 80C. It is more than fixed income instruments such as the Public Provident Fund, or PPF, and the National Savings Certificate, or NSC.

Good tax management can go a long way toward enhancing your return. But the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion.

Most individuals rarely think about tax planning from an investment point of view. Hence one finds that they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up investments that will give them the tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.