A Guide to Personal Finance for Young Professionals

As a young professional, you have millions of dreams: You want to buy a car and a house, holiday at exotic locations, and fulfil the expectations of your family. However, there is a financial cost attached to all these dreams for which you need to invest and save.   

The three traditional thumb rules of investment are: start early, diversify your portfolio and take risks. While there is nothing inaccurate about these financial mantras, when you have just started a new job, or are dissatisfied with the current job, or you’re coping with unemployment and have debts to repay, financial planning may be the last thing on your mind. The good news is that in spite of your circumstances, there is a way to invest wisely and meet your financial goals. 

Here is a basic guide to making investing a simple affair for young professionals. 

Prioritize Monthly Spends

“I don’t know how much to save, so I end up spending more.” 

If you are in a similar dilemma, follow Warren Buffet’s advice: don't save what is left after spending; spend what is left after saving.  Before the fifth of every month, put all your expenses in two buckets: priority (for example, rent, EMI, utility bills or household expenses) and non-essentials (for example, entertainment, travel, etc). This budgeting will help you spend only on what is necessary and save the rest.

Maintain at least Two Different Bank Accounts

It is a natural tendency to spend more when you see a higher bank balance. You can keep this habit at bay by maintaining two different bank accounts; one for regular expenses and the other to grow your nest egg. As soon as you get your paycheck, put around 20-25% of it straight into your investment account. Even if there are no earnings for a few months, try not to touch your nest egg.

Plan Your Taxes Ahead

Only fools rush their tax planning at the last moment. By doing your tax planning at the beginning of the financial year, you can save a good amount of money in the form of higher tax refunds, reducing tax penalties and earning more interest on investments. Let’s say, if you invest in a tax-saving instrument in April 2018, the money will have one year to grow and fetch a higher interest compared to investing it in the last quarter of the financial year. The saved amount of taxes can be utilised towards further re-investment.  

There are various sections of the Income Tax under which you can reduce tax liability. However, the most popular and significant is Section 80C, which allows you to claim deductions up to Rs 1.5 lakh.

Invest in Monthly mode

The beauty of investing in monthly mode lies in the fact that you can start it with an amount as low as Rs 1000/- every month. Monthly payment plans instil a habit of compulsory savings and make you a disciplined investor. Since these plans work on the principles of rupee cost averaging and the power of compounding, they minimise the risk of market fluctuations and create a large corpus over a period.  Such systematic investment approach can be taken for Mutual Funds, Unit Linked Insurance Plans (ULIPs). Plans like Equity Linked Savings Schemes (ELSS) & ULIPs can give you the additional benefit of tax savings under Section 80C.

Buy a Life Insurance Cover

Life insurance is not an expense it is an essential investment to secure the financial well-being of your family after you are not around. You can choose from term plans, money-back plans, endowment plans or Unit Linked Insurance Plans (ULIPs). HDFC Life offers all these plans and customises them to incorporate your investment objectives, assets and liabilities, and the number of dependents. For instance, HDFC Life’s Click 2 Protect 3D Plus protects you against uncertainties like death, disability and disease. Regardless of the type of insurance policy you buy, you are eligible for tax benefits under Section 80C. This way, an insurance policy will give you dual benefits of life cover as well as tax savings.

Managing money during your early professional life will enable you to take control of your finances and also make taxes work in your favour. So start early to reap the benefits.