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Why Your Salary Needs To Be Used Productively
Oct 27, 2017

The first ones are always special and very close to our heart.

Remember your first day in college? Your first medal/award, love, bike, car, job, etc.

It is said that you never forget the experience of your first job. The tiniest of the details of meetings with your boss, acknowledgement from seniors, long chats with your colleagues, the stress and challenges, etc.

Your first salary might have been the most anticipated event of your life. Probably a dream you've carried several times in your life. Right from the first day at work, you did your mental math about how, when, and where you were going to spend your first salary.

Isn't it?

"Your salary has been credited to your account" -- is the message you receive on your mobile number.

And after 30 days of toil, you finally receive your salary.

What would you do? Splurge the entire sum or save some?

Rahul, a software engineer, has been working in an IT company for the last five years. He remembers spending his entire first salary on partying. His spending habits became splurging. He became a proponent of the phrase: 'work hard and party harder'. He started living from paycheck to paycheck. He ignored saving money for any of the future goals. Due to the rise in automation and redundancy he lost his job three months back. He now regrets not having saved enough money to meet emergency needs.

It is natural for millennials to splurge first salary on indulgences and even the ensuing paychecks in the initial years of the economic life cycle. Their life goals and achievements are influenced by peer pressure, and to tick-mark their social media checklist of keeping up with the herd. But you can never afford to ignore the importance of time and value of money.

Let us look at how you can use your salary in most productive manner:

  1. Budgeting

    Budgeting is the first step to lead a healthy financial life. All it needs is discipline on your part to optimise savings and maximise returns by allocating a sizeable portion prudently to productive asset classes to achieve long-term financial goals.

    Hence, make a note of all your sources of income and expenses. Make a list of unavoidable expenses such as gas bill, electricity bill, groceries, etc.; then, make a list of all the discretionary expenses such as entertainment, dining out, etc.

    Listing the various sources of income and expenses seems daunting, time consuming, and tedious; but with the advent of web based software and mobile applications, budgeting has taken a whole new dimension. Graphs, pie charts and ratios further help in pin pointing the problem area.

    Hence, seek the help of such applications and plan your salary accordingly.
  2. Focus on saving more

    Save, save, and save-there is no other way.

    As Warren Buffett rightly says, "Don't save what is left after spending, but spend what is left after savings".

    No matter how big or small your paycheck is, always subscribe to a saving habit. Find out every month how much you can save and put it aside diligently.

    With numerous spending opportunities available do not turn into splurging. Bring in a little change to the small spends / lifestyle expenses and you will be able to save more. For example, opt for a share cab or car-pool to commute to work rather than driving alone. In this way, you will not only save money, but also save on fuel and contribute less towards the overall pollution.

    Your first salary is likely to be the smallest amount you will earn in your work-life cycle, but you will cherish that for the rest of your life. So, spend on creating experiences for a life-time and inculcate the habit of saving.
  3. Invest regularly for long-term

    Mere saving is not enough. Once you start saving, you ought to put your money to work and create wealth for you. Yes, you heard it right, invest money in right kind of assets that can help you to achieve your goals and build wealth for the future.

    For this, an action plan with the right asset allocation mix will enable you to achieve your financial goals-short term, medium term, as well as long term financial goals. Subscribe to Systematic Investment Plan (SIP) of a mutual fund schemes. This simple step would make sure you invest religiously in the interest of your long-term financial wellbeing. And if you aren't sure of which mutual fund schemes to pick, PersonalFN will show you the way with its Exclusive Report on SIP-worthy mutual funds-The Super Investment Portfolio - For SIP Investors. We recommend that you opt in for it. After our rigorous shortlisting process, we go a step ahead when picking funds that are SIP-worthy.
  4. Pay-off your debts

    If you have education loan or any other kind of personal loan pay it off as soon as possible. In this way, you will save on the interest expense and bring in financial freedom.

    Also, if you owe money to friends, siblings, or parents, ensure you repay them too. Don't wait till they are compelled to ask for it. Remember, the ones closest to you will find it more awkward to ask for their money back. Hence, clear off all your debts and add to your credit worthiness.
  5. Create a Contingency Fund

    A contingency fund as the name suggests is created to meet up the emergency needs. With the rising uncertainty in job markets, this is the most important task you need to do for yourself. Your contingency Emergency fund should be at least 6-12 months of regular monthly expenses including EMIs and insurance premiums. This kitty will help you sail in rough seas, in a difficult phase of life.
  6. Set SMART goals

    Before embarking on your investment journey through mutual funds, first set S.M.A.R.T. financial goals. This means that your investment goals should be Specific, Measurable, Adjustable, Realistic, and Time-bound. Investing in an ad-hoc manner without any focus will lead to inefficient utilization of your savings.
  7. Buy an Insurance Policy

    Insurance is vital when planning for various life goals. Most individuals mistake insurance for investments attempting to justify their purchase by the "guaranteed returns and bonuses". However, the objective of insurance is not investing and earning a return on it; on the contrary it is indemnifying the risk to life, health or anything else such as your home, vehicle, etc. in case of an untoward incident. While purchasing a life insurance policy make sure the sum covers you optimally with the right policy term. Use our HLV calculator to calculate the optimal amount of insurance you need and make sure to compare the features and premiums before signing the dotted line. Go a step further and add a reminder in your e-calendar to avoid defaulting on the premium payment date.
  8. Use Credit Card Wisely

    The biggest problem for most millennials today is to inculcate the importance of delayed gratification. High pay cheque and easy credit (credit card) have fuelled the urge to fulfil all of life's demands, turning a blind eye towards affordability. This attitude is sure to sink the ship. Credit cards can be used smartly to make the best of the deals and rewards. But don't sign up for more than 2 credit cards to avoid impacting your CIBIL score. Make sure to pay the credit card dues on time and in full avoid extra interest or late payment fees. However, if you can only make the minimum monthly repayment, switch to a card with a lowest interest rate, and repay more when you can.

To Sum-up...

These are the most fundamental points to keep in mind at the start of your financial journey. Save and invest money regularly. Plan your finances prudently. Let the power of compounding work on your money. This does not mean you give up on your wishes and desires, it only means to plan well in advance and use your hard-earned money productively.

If you wish to learn the art of financial planning and manage your personal finances better, PersonalFN has developed a comprehensive program: Become Your Own Financial Planner. With this e-course, you too, can create a financial plan like an expert. It will be your guide to most serious decisions regarding money matters. The tutorials start with the basics of budgeting and managing cash flows and then moves on to how to set SMART goals. You will also learn how to select winning mutual funds, along with the right asset allocation and its importance. The modules will also outline strategies to build your optimum investment portfolio and much more.

Apart from the video tutorials, you will get access to a host of downloadable calculators, such as a Cash Flow Calculator, Retirement Calculator, etc. Absolutely Free! Don't miss this opportunity. Subscribe to the e-course now!

Be moneywise in the interest of long-term financial wellbeing.

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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