Adulthood can be quite confusing.
You graduate college. Suddenly, it feels like you were thrown into the deep end of the pool.
If you are lucky, you get a job soon after. Then, you get into a new set of routine. Thankfully, at the end of this schedule, you are paid money (unlike college, when you had to pay the fees).
But money—boy, that opens a whole new can of worms.
What do you do with the money? How do you manage to make it last? Many such questions start the moment you start earning.
Here’s an easy step-by-step guide:
Step 1: Secure your present
Have you ever seen clowns and acrobats in circuses? There’s always a safety net near the ground. Just in case any of the clowns fell, they’d be safe.
Similarly in life, it’s safety first. Whether in life or money, it’s always important to protect your base first. In this case, this refers to your life and health insurance.
Any problems with your health or life can burn a big hole in your pocket. Here are some examples:
- 25-year-old Rajan got caught in a motor accident. He is now paralysed waist down. He used to earn Rs 80,000 every month earlier. Post the accident, though, he’s entirely dependent on his parents.
- 35-year-old Bharat used to earn as much as Rs 1.5 lakh every month. He had a great amount of savings to be used for buying a house of their own. However, barely a month before he paid the downpayment, Bharat was diagnosed with throat cancer. The treatments ate up most of his savings and also affected his salary income.
This is why it’s important to first protect you and your family with insurance. In both the cases above, a simple insurance that costs a few thousands could have come to the rescue—either to provide a regular source of income or to take care of the medical costs.
Step 2: Shield yourself from taxes
The next step is investing to save tax. After all, there’s no point in earning higher amounts if you are bleeding tax. Plus, investing to save tax serves a dual purpose—it helps you save money today AND increase your wealth for the future. How you ask?
You can invest a maximum of Rs 2 lakh every year. That means, over a span of 25-30 years, you can save up to Rs 50-60 lakh. That’s your saving alone.
Now, let’s assume you earn a 10% interest/return every year. Over a period of 30 years, you will accumulate Rs 3.29 crore. This money can easily be used for future goals like down-payment for a new house, your retirement fund, children’s education/wedding, etc.
That’s why, before you do undertake any other saving or investment activity, start investing to save tax. Here are the key investment options to save tax:
- Life insurance
- Tax-saving Mutual Funds
- 5-year bank or post office deposit
- Senior Citizen Savings Scheme
- National Savings Certificate
- Provident Fund
- National Pension Scheme
All of these can help you earn a return. But the risk exposure may vary. So, this is the main bit of research you need to conduct.
Choose a mix of these investments at the start to figure out what works best. Remember, the younger you are, the higher can be your risk appetite. So, don’t shy away from risk.
Step 3: Be ready for emergencies
A life and health insurance policy is a must-have tool, especially to help you during emergencies. But that’s not enough. You need cash ready too. This is why one of the biggest steps to take is set Rs 1,000 or Rs 2,000 every month in a separate emergency fund. This way you need not utilise your savings every time an emergency strikes. It helps safeguard your future, speaking of which…
Step 4: Prepare for the future
Once you’ve taken care of your present, it’s time to jot down everything you want to do in life. Make a list of all your goals—small or big.
Next, add a timeline for each and the amount it would cost you. Ensure it’s realistic.
Then, figure out how much you need to save for each goal.
You can assign your tax-saving investments for these goals too. For example, 33-year-old Sheela bought herself a money-back life insurance policy. She had to pay a premium for 15 years. From the 18th year, the policy would pay her Rs 1 lakh or so every year. She planned to use this money to fund her child’s future education.
Whatever remains is how much you need to save and invest extra. But don’t be hard on yourself. You can always save/invest more when your salary increases.
Step 5: Get your timings right
Ironically, money management is not much about maths. It’s more about time—how do you manage your money well enough that it lasts at all times.
So this is the most important step. Whatever decision you make, keep in mind its repercussions on your immediate future as well as the long-term.
The bottom line
Money management sounds very difficult and arduous. But if you take baby steps, it can seem quite easy.
The idea is to first learn the ropes, start small and then dive into the deep end of the pool.