What to do with your first salary? Here are 7 tips to use it well
Receiving the first salary is a very empowering landmark for every person because it marks a special, never-felt-before sense of power, pride and responsibility. When it comes to Indians, it is usually an unspoken ritual to gift your parents something special from your first salary. In fact, Carat Lane's latest ad titled ''How to spend your first salary'' got a lot of people nostalgic on Twitter because it reminded them of the time when they spent their first salary on their parents. Here's the ad:
I was about 19 when I received my first salary, and I am guessing people on an average receive their first salary in the early 20s.
Here's what happens when you make money at that age:
Young adults don't really have a lot of idea about the kind of money that is needed to live a happy and comfortable retired life. They do not think so much about the future as their focus is mostly on getting their career goals sorted. They also prefer to spend on their basic needs and having fun whenever they can. That means spending on basic needs like phone bills, internet, going out with friends etc.
Also, given that there is a hoard of information available online, and the fact that each person tries to share their ''free advice'', it is very likely that young adults might spend, save and invest just like their friends or colleagues, ''just because they are doing it that way too''.
If you have received your first salary recently or will be receiving soon, here are 7 things to remember:
1. KNOW WHAT IS IMPORTANT FOR YOU & PLAN ACCORDINGLY:
It is important to know what you desire and create an investment plan according to your life goals. Also, even if your priorities change over a period of time, your investments can still keep piling up and be useful for those goals.
2. SAVINGS ARE NOT ENOUGH
If you are very new into the world of managing your money, you might feel that it is better to keep your 'savings' portion of money aside in the form of cash (at home) or in your savings account. But savings merely means that you are keeping aside money in an 'idle'' form.
Instead, keep some part of your money at home and also keep some money aside to ''invest''. Though your money at home will stay idle, your ''investment'' money will keep growing over the years.
3. USE TIME (& TECH-TOOLS) TO YOUR ADVANTAGE
Though a lot of young adults know this fact, they struggle to implement it: The younger you are when you are starting to invest, the more money you can make. How? When we start earning, we all think of investing a certain amount of money to create a reserve for our future landmark events like marriage, retirement or going abroad. There are two ways of making money work for you:
- Invest smaller amounts over a longer time or
- Invest larger amounts over a shorter time
Supppose you are a 22-year-old today and you want to receive Rs 50 lakh by the time you retire at 60. So, you have about 38 years of service left. Say you receive a normal return of 7% on your investments. So, you might wonder about how much to invest in a SIP or mutual fund every month to reach that goal.
If you use this SIP Goal calculator, you will find that you will have to contribute Rs 21,000 per month to reach this goal if you start investing now as a 22-year-old. If you start later, say 10 years later at the age of 32, you will have 28 years of service left (60-32). Now if you want to invest in a SIP in a way to receive Rs 50 lakh by the age of 60, you will now have to invest Rs 26,000 per month.
4. A WORD ABOUT THE SO CALLED 'MONEY-RULES'
When financial experts on Google say things like: ''Invest 50% of your salary in stocks'', ''Save more money'' and ''live on less'', it is a really painful turn off. Let's face it: no young adult will listen and be able implement impractical financial advice.
Because it may often happen that if a person starts of with a salary of 15 to 20K, they may not really be in a position to invest 50% salary in anything or save more money. But just because you cannot follow an expert's ''money saving'' tips to the T, does not mean you don't save at all.
Experts prescribe money rules that work for them. For eg: there is a 50-30-20 rule that prescribes you to:
- Spend 50% of your income on basic necessities like roti, kapda, aur makaan. It includes things like transportation, phone bills, gas and electricity bills, internet, spending on basic clothes etc.
- Spend 30% on your 'Wants' like using a Car (instead of a cheaper rickshaw ride), buying expensive clothes, consumer electronics, and vacations.
- Spend 20% on savings and investments like mutual funds, stock market, real estate etc.
Though this can work well for young adults, this is just a tweakable guideline. You should make your own money rules as per your desires and your responsibilities.
For eg: If you are staying with your parents or roommates, you can choose to first transfer 40% of your income in investments (instead of 20%), keep aside 30% for your basic needs (instead of 50%), and splurge 20% on your 'wants'.
5. DON'T PUT ALL YOUR EGGS IN THE SAME BASKET
You can invest either by yourself or with the help of your financial planners, through two modes:
- Buy equity shares and own a part of the company or
- Invest in debt securities by giving a loan to a company.
Equities are a high-risk-high-return investment option and MAY give you a good return since it depends on the company's performance and the stock market. Debt securities will definitely give you a moderate return on your investment.
Usually, it is preferable to invest in both equity and debt securities since you don't want to put all your eggs in the same basket.
6. PREFER INVESTING OVER SPENDING
When was the first time you had your first ever Dominoz pizza? Let's suppose it was in 2018. Now if you have eaten one pizza a year for the last 5 years and spent say Rs 250-300 per pizza, you might have spent around Rs 1,500-2,000 till date. With no monetary return on expense.
Now, if you had spent the same money on buying shares of Jubilant FoodWorks Limited (ie. Dominoz pizza), you would have actually made more money. The share price has increased by over 350% in the last 5 years and today, you can still buy one share for Rs 488.
This is what the price of Dominoz shares looked like on December 31 every year:
- December 31, 2018 - Rs 176
- December 31, 2019 - Rs 262
- December 31, 2020 - Rs 336
- December 31, 2021 - Rs 558
- December 31, 2022 - Rs 718
Even if you had bought one share every year for five years and sold all of the shares today at Rs 488, you would have still made a 20% gain.
7. BUY A HEALTH AND LIFE INSURANCE
Buying an insurance cover is always a good use of money as it allows you to breath a sigh of relief in times of unexpected visits to the doctor. The higher the cover, the better insured you are. Websites like Policy Bazaar make it very easy to browse through options and show you benefits of all kinds of policies. Be sure to double check on the terms, policies and benefits before you invest since insurance policies are often a long term commitment.
Hope this helps.