National Pension System

Has your child joined the job market? Suggest these steps for a long-term financial plan

Has your child got his or her first job? Getting the first job and the first salary at the end of the month is not just a liberating and empowering feeling for the new entrant in the job market, it is a proud moment for the parents.

However, as one embarks on one’s long career path there would be added responsibilities ahead and challenges that one will face for which one needs to be prepared. Handling the money earned would one of the many such challenges.

As a parent what should be your advice for using the salary wisely? Would it be too early to start thinking of a long-term financial plan right from the work go? Or is it time to spend and enjoy? Financial planners say that the first tentative steps towards creating a financial plan should be taken right when you have your first salary cheque in hand.

“Like most good things in life, wealth creation too takes its own sweet time. The sooner you begin, the larger the corpus you can create,” Amar Pandit, Founder, said.

Nirmal Rewaria, CEO & Co-founder, Finpeace agrees.  “One should start saving from the first pay cheque itself since in near future there would be a lot of liabilities like marriage. Also, before marriage one needs to have its own house and small car and basic amenities for the partner,” says Rewaria told Moneycontrol.

Rewaria suggests that parents should suggest the following financial steps for their kids who have just started earning:

–One should never forget that job is not secure now a days. So one needs to slowly develop a contingency fund which is equal to 6 months of monthly expenses

–Investment in bank fixed deposits and liquid funds can be considered for creating the liquid contingency fund.

–Start putting small amounts in equity mutual funds through SIPs starting from first salary cheque, if possible, for building long term corpus,

Anil Rego, Founder and CEO, Right Horizons says the starting point for a new entrant in the job market is to prepare a monthly budget and stick to it. ‘Do not over-spend,” he says.

Rego suggests passing on the following financial planning advice:

–Divide expense budget into two buckets: must-spend and can-spend items. The total amount for can-spend items, like on entertainment, travel, clothes, food etc, in any month, should not be more than must-spend items.

–Next, save 25% every month. If one fail to do so in one month, one will have to save more the next month to make good of the previous month’s excess spending. Savings component will ensure that spending does not get out of control.

–Do not spend money that that has not been earned i.e. credit card, loans from family/friends or banks etc. Spending money not earned may lead to a vicious debt cycle, which will forever haunt your earnings.

–The motto should be: Earn, Save and Spend. Spending comes after saving. Without saving, one cannot hope to invest.

–Start early. The quicker one saves and invests, the easier life will be. Early savers accumulate more wealth than who do late. This is because of the effect of compounding of wealth. When one saves and invest early in the career, there will be room for mistakes. Since time is on your side, mistakes will not have a big effect. Individuals who start late have to save and invest much more, thereby forcing them to make mistakes.

–Invest most of the money in equities or equity-linked products. Young age means longer time at one’s disposal. The risk in any financial investment asset goes down with time. This means for somebody who is investing in a risky asset for long-term, say 20-25 years, the actual risk is quite low.

–Avoid bank FDs as long term investments as they have low return avenues at first.

–Avoiding low return does not mean one will invest in high risk avenues like cryptocurrencies.

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