18 January 2022
Highlight: Snap out of your comfort zone – it’s time to start making your own (brilliant) financial decisions. Follow these simple rules of investing if you are a first-time investor.
Investing is essential to achieve your financial goals and secure your future. You save and accumulate a fortune for a rainy day with a perfect investment portfolio. In addition, making regular investments instills a sense of financial discipline in the long run.
Of course, there will be ups and downs. But it’s certainly a better idea to start investing young so that you have decades to ride them out. To be on the road to financial wellness, it’s a good idea to start planning how you can invest your salary, once your basic expenses are met.
Inflation, in simple terms, is a surge in the price of goods and services. By decreasing the worth of your money, it reduces your purchasing power. One cannot control the inflation rate. If you want to stay ahead of it, you need to have more money. But money cannot grow on its own.
If you want your money to grow, it has to earn returns, and the best way to ensure this is to invest. Therefore, a robust investment portfolio is necessary to tackle inflation.
For instance, if inflation is at the rate of 8% – you’d require 8% more money than what you have to purchase the same item next year.
Here’s how inflation reduces the worth of Rs 1 lakh over eight years at 8% :
|Amount in hand now||Rs 1,00,000|
|After one year||Rs 92,000|
|After two years||Rs 84,640|
|After eight years||Rs 51,322|
It is essential to earn inflation-beating returns.
Spending more than what you earn will only leave you in a difficult debt. Spending exactly how much you make means you won’t have any money to tide you over in bad times. Spend less and invest your savings smartly to ensure a livable future awaits you.
Record all your income and expenses along with the inflow and outflow. Once you can classify how much you spend on essentials and how much goes to entertainment and miscellaneous expenses, you will cut down on the extras and plan your money better.
Put away 10–20% of your salary to have that money available in case of an emergency, always.
You should also budget to invest this amount in a liquid fund. A liquid fund is a debt mutual fund that invests money in instruments generating fixed-income like FDs, commercial paper, certificates of deposit, around 4%. Invest your savings every month (long-term) and see the magic it can do for you!
You determine your future by planning to deal with surplus cash because you are likely to overspend when you don’t have a plan.
Start with identifying goals like buying a vehicle or planning for retirement. Categorize those goals into short-term and long-term. Goals achievable within 1 to 3 years are essentially short-term, goals that will take more than five years will be long-term goals.
Identify your risk appetite. If you can digest, say, a 25% fall in your investment value, you will be a high-risk seeker. Else, you are a risk-averse investor.
Once you identify your goals and risk appetite, you can select the investment haven conveniently. A risk-averse short-term investor may pick out a portfolio with a more liquid or balanced fund. Conversely, a risk-seeker may go for a diversified equity fund.
Learning where and how much your income is going to be taxed is essential. Usually, at the beginning of your career, tax saving is not a priority as your income is not high, and you may not be aware of the taxation rules. But large starting salaries, as well as accelerated income growth in the corporate sphere, are expected.
With attention to detail, you can reduce your taxes, increase your disposable income, and pick investments with low tax incidence. So, keep yourself updated about investment options like ELSS, PPF, and NPS to get maximum tax benefits.
Other than that, many deductions are available in the Income Tax Act under Sections 80C through to 80U.
Take advantage of Section 80C by investing in Equity Linked Savings Scheme as it has the shortest lock-in period. ELSS is a diversified equity fund that helps you achieve your financial goals in the equity market via investment.
You can save taxes up to Rs.45,000 and avail of a deduction of up to Rs.1.5 lakh under this section.
Asset allocation divides your investment portfolio among different asset categories, such as stocks, bonds, and cash, by understanding your needs. It depends primarily on your time horizon and the ability to tolerate risk.
A stock, or otherwise known as equities, is a share of ownership in a single company.
A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years while receiving your interest.
A mutual fund is a mix of investments. It allows investors to purchase a diverse collection in one transaction instead of picking individual stocks and bonds.
Like a mutual fund, an ETF also holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock and one can purchase it for a share price.
The following table summarises the various investment portfolio options:
Healthcare costs are increasing with each passing year. And as time passes, you are more vulnerable to ailments. In the absence of a social security net, you need to have your funds to fund all these expenses.
While planning for retirement, you need to clarify a few points, like deciding an age at which you want to retire and how much money you will need to meet your post-retirement expenses per month.
Suppose that you plan to retire at 60 years, and your monthly estimated expenditure after retirement is Rs 50000. Assuming a rate of return of 12%, you need to contribute a SIP of Rs 2,900 every month for 30 years to accumulate a corpus of Rs 1 crore.
Formulate a plan for the future to keep things in place
If you don’t know where to begin, then take advice from a reliable source. Opt for a Salary Card or get an instant loan to start your life portfolio and your investment journey. It is convenient, paperless, and hassle-free at EarlySalary.
You need to set long-term agendas for your life, just as you do for your days. Financial objectives involve a lot of commitment and preparation. So, the sooner you begin, the better. Bagging the first job is a milestone achieved. It would be the start of a successful career in a real-world setting, and investing to increase your returns is a much-needed cherry on the cake!