Starting your professional career and receiving your first paycheck is an important milestone. As an adult, you are given the job responsibility of working with your colleagues and completing the tasks set by your boss. In addition to these changes, you will also have access to your hard-earned income.
However, with this newfound financial freedom comes the responsibility to manage your money wisely. It’s easy to indulge in impulsive spending and instant gratification, but it’s important to balance enjoying your income with planning for the future. As a young earner, it’s imperative to understand the value of money and the importance of budgeting and saving. Let’s take a closer look at the financial mistakes to avoid early in your career.
Once you start earning, you will have access to your own funds. Celebrating your first job and the income it brings is perfectly fine, but it’s also important to watch out for impulsive spending. “Don’t buy too many expensive luxuries like branded clothes or top-of-the-line smartphones, and don’t buy your own car right after you start your first job,” says staffing firm Team Lease. Executive Director of the Service, Rituparna Chakraborty said.
There is an easy way. budget. Then stick with it.
Rent is one of your biggest expenses. “Ideally, you shouldn’t spend more than 30%[of your salary]on rent. Get paid accommodation,” advises Chakraborty. Managing your hard-earned money wisely is critical to ensuring financial security and maximizing your earnings.
not having enough savings
Developing financial prudence is more than just avoiding overspending. It also includes developing thoughtful saving and investing habits from your first paycheck. “At least 25 percent of his salary should be saved or invested,” Chakraborty said.
Hemant Rustagi, CEO of financial planning firm Wiseinvest Pvt Ltd, shares a similar view. “As a rule of thumb, he should aim to invest 20 to 30 percent of his monthly salary,” Rustagi says. But Rustagi elaborated that the rule of thumb does not take personal circumstances into account. Therefore, you may invest more or less depending on your household budget. “In both situations, the key is to start the investment process early and continue to increase investments as income increases over time,” Rustagi added.
Some financial planners believe that savings should be based on personal financial goals. Sanjeev Govila, SEBI Registered Investment Advisor and CEO of the Hum Fawzi Initiative, a financial planning firm, said the first goal for a beginner is an emergency budget worth at least three to six months’ worth of living expenses. said to build a corpus. . “You can start with about 10% of your monthly salary (savings) in the early stages of your career and gradually increase the amount as your income increases,” Govira said. He added that you should start saving 10-15 percent of your monthly income for retirement, and consider allocating about 20-30 percent for long-term investments and 10-20 percent for short-term goals.
And if you have debt to pay off, such as an education loan, you should put 10 to 20 percent of your monthly salary toward paying it off until the debt is gone, Govila added.
“Of course, these percentages are general guidelines and should be adjusted based on your specific financial situation, goals and risk tolerance,” emphasized Govira.
Doesn’t understand tax implications
Did you know that the salary you receive may already have a TDS (withholding tax deduction) adjusted by your employer? It’s important to note that sometimes you can. This is because certain investments and expenses are eligible for deductions, ultimately reducing the overall tax burden.
Ideally, you should do the declaration first and avoid unnecessary TDS in the first place. But don’t forget to make the necessary investments to match your declarations during the fiscal year.
By strategically planning your investments and spending, you may be able to maximize your deductions and receive a refund of excess taxes withheld from your paycheck. It is imperative that you consider the various tax saving options available, such as investing in tax-saving instruments such as mutual funds and public provident funds (PPFs), and deducting expenses such as medical expenses and mortgage interest payments.
An endowment policy may provide you with the benefits of a Section 80C tax credit. However, the budget can be large as you have to sign a contract every year. Look for investments with minimal tax impact or exempt from paying taxes at all stages of the investment lifecycle. Or tax implications commonly referred to as “exemption, exemption, exemption” (EEE), which means exemption, exemption on investment and exemption on exit. PPF is one such product. However, it requires a long maturation period of 15 years.Make sure it fits your financial plan and asset allocation
These are some of the pulls and pushes that arise from the world of taxation. Income tax is an inevitable reality once an individual starts earning. Make sure you understand the impact of taxes on your income and investments. “If you ignore tax planning, you may miss the opportunity to save money,” says Govira. Talk to your financial advisor or use his online resources to learn about tax planning and investment strategies.
“Learn about the various tax-saving investment options available in India such as Equity Linked Savings Scheme (ELSS), PPF, National Savings Certificates (NSC), tax-saving fixed deposits. Let’s optimize our obligations,” added Govila.
take on too much debt
Once you start earning an income, you will be able to access credit from various financial institutions. However, it is important not to start using credit just because you are eligible. Avoid taking on large amounts of debt, such as credit card debt or personal loans. “Don’t let your credit card membership exceed 30% of your monthly salary,” says Chakraborty. It is important to live within your means and avoid incurring debts that you cannot repay.
Also read: How much can I borrow for a mortgage?
not planning for the future
“One common mistake is not setting clear financial targets,” says Govira. He adds, “Define your short-term and long-term goals, such as saving for purchases, creating an emergency fund, or planning for retirement. helps maintain the
Newcomers often tend to think they should enjoy the money they’ve made in their first few years rather than focus on saving and investing. “The fact remains that if you start saving and investing at an early age, you can lead a disciplined financial life and benefit from the power of compound interest, without compromising your current lifestyle,” says Rustagi. .
Where to invest is also an important aspect for beginners to understand. “Young people are being told to avoid investing in stocks. In most families, parents and relatives encourage newcomers to invest in traditional options and commodities such as fixed deposits and gold. Because of this, fears and misconceptions about stocks keep young people away from them.” If you start investing in equity funds through SIP (Systematic Investment Planning), you will understand the potential of equities and the potential of investing.” That is the role it can play in securing its financial future. More importantly, it will help you understand the dos and don’ts of investing in stocks. Its main advantage is that once you reach a stage where you have the money to seriously invest, you will have a better understanding of the stock. Better,” Rustaj added.
So live your life to the fullest. But remember, it’s imperative that you have a long-term financial plan that includes goals like buying a home, starting a business, and saving for your children’s education. Start planning early and work towards reaching your financial goals gradually over time.