School days often hold some of the most cherished memories in our lives, characterized by a sense of fearlessness and freedom from responsibilities. It’s somewhat ironic how, as we grow up, we eagerly anticipate leaving school, venturing into the world independently, and securing our financial future, only to yearn for the carefree days of our youth.
One aspect that is unfortunately absent from a student’s educational journey is early guidance on effective personal finance management. I firmly believe that this crucial skill should be included in the high school curriculum and emphasised during graduation, regardless of the chosen academic path.
In today’s social media-dominated world, it’s easy to fall into the illusion that personal wealth can be quickly attained. However, this couldn’t be further from the truth. Building personal wealth, for the average person, typically requires 15 to 20 years of dedication, patience, and discipline.
It’s challenging for recent graduates who have just started their jobs to manage their finances effectively. They often either spend their entire income or let it accumulate in their savings accounts. Many justify their lack of savings by citing their initial lower salaries and plan to start saving once they earn more.
This approach is fundamentally flawed. Consider a scenario where their employer reduces their salary by 10%. Does this change mean they can no longer cover their expenses? In reality, most people find ways to adapt.
I greatly admire Warren Buffet, who once said, ‘Do not save what is left after spending, but spend what is left after saving.’ This statement left a lasting impression on me. The idea is to consistently set aside at least 10% to 20% of your monthly income as soon as you receive it.
This habit fosters a culture of saving. Now that we’ve emphasised the importance of saving and managing personal finances, let’s explore various strategies to achieve this goal. While I understand that individual circumstances may necessitate different approaches, I’ll highlight fundamental principles applicable to most situations.
The first step for any new working professional should be to invest in health insurance. Medical expenses can be exorbitant and place immense financial strain. Once your immediate health is secured, the next step is to consider term insurance.
Personally, I only began investing in term insuranc e after almost four years into my professional career, when I got married. While it may not seem urgent, life is fragile, and we never know when our time will come. Investing in term insurance safeguards the financial future of those depending on you.
After securing your immediate and long-term future, open a Public Provident Fund (PPF) account and maximize the ₹1.5 lakh limit to save on taxes.
Although PPF offers relatively low interest rates, it’s a safe option, and all income generated is tax-free. I started investing ₹5,000 per month in PPF when my first job paid ₹20,000 per month. Over the next couple of years, I increased my contributions to reach ₹1,00,000 per year.
Starting early (around age 18-20) can accumulate a substantial amount (approximately ₹42-45 lakhs) by the age of 35, all of which remains tax-free if withdrawn. Once you’ve established a PPF investment routine, create an emergency fund equivalent to a year’s salary and invest it in debt funds or fixed deposits.
In an unpredictable job market, such a fund provides a safety net in case of unforeseen circumstances. The aim is to protect your investments, even if they’re not growing.
When I moved to the US in 2003, I expanded my savings and started Systematic Investment Plans (SIPs) in two mutual funds. My goal was not just to invest but also to gain a deeper understanding of the industry. I discovered that if you feel you can save more but lack expertise, investing in index-based mutual funds based on your saving objectives is a sensible choice.
Some might be saving for short-term goals like buying a car or going on a vacation, in which case low-risk debt or debt-equity mutual funds are suitable. For long-term investments, consider reputable mutual funds or consult financial advisors for comprehensive financial planning.
A key aspect of increasing savings is cutting expenses. While this may seem obvious, many overlook it and incur avoidable costs. Avoid purchasing anything on EMI, as this can trap you in a cycle of debt, hindering your savings growth. It’s wiser to save for a few months and then make the desired purchase outright. After all, earning interest on your savings is far more advantageous than paying interest on debts.
One exception where EMIs can be beneficial is when buying a house with a home loan. Even then, it’s advisable to allocate 15-20% as a down payment from your savings, reducing the loan burden. While there’s no one-size-fits-all strategy, I hope sharing my experiences helps the next generation better prepare for their financial journey.
(Author Saurabh Jain is Co-Founder of CollegeDekho. Views expressed here are personal.)