A must-read primer on the do’s and don’t's of good money management, especially for those just starting out on their careers.

By Poornima Kavlekar

When I started my career in the mid-90s, my father gave me two basic money rules to follow. One was to start an insurance plan as early as possible and the other to follow a disciplined approach towards savings. I did. Today, I am reaping the benefits. I would like to share my learning with our 20-something young readers who are taking their baby steps into becoming financially independent. With time on your side and fewer responsibilities, this is the perfect period to lay the foundation for a secure future by regulating savings and smart investing.

1. Start planning early. Something that Mumbai-based financial analyst Varsha Thakur, 21, did. Just three months into her financially independent world, she has already invested in fixed deposits with banks and bought some gold coins. Varsha’s approach allows more time on your side for money to grow. This is when the power of compounding works best. This is nothing but reinvestment of income for the long-term at the same rate of return to constantly grow the principal amount, year after year. For example, if you make a single investment of Rs 1,000 in an instrument that offers you a return of say 10 per cent, it will grow by more than 10 times at the end of 25 years.

Starting early also helps in achieving financial goals easily. A marriage planned or child’s education will put little pressure on your finances. Manish Jain, Certified Financial Planner, knowledge partners, a financial planning services company, feels, “Early planning helps in creating a ‘mid-term nest egg’ if the young lady decides to take a career break after 8-10 years or so to bring up her children or to study further.”

2. Set clear goals. Clarity on why and when you would need money is essential. Classify your goals into short-term (like buying a bike, car or even funding your education), medium-term (marriage plans or buying a home) and long-term (retirement planning and child’s education). Project an estimated cost of each goal and calculate how much you need to set aside for each period. A short-term goal of buying a bike which costs around Rs 40,000 would mean that you need to set aside Rs. 5,000 from your salary for the next 8 months.

Varsha requires close to Rs. 3 lakhs to fund her Masters in Business Administration that she proposes to take up after two years. And she saves almost 60 per cent of her salary to realise her goal. Prioritise your goals and set a schedule for it.

3. Invest based on your goals. Divya Rangan,*, 22, a Chennai-based assistant director, wants to move into her new home in the next 2 to 3 years. And she has started saving towards the down payment of the housing loan. L.Ravindran, Managing Director, Wealthmax enterprises management, a wealth management company suggests, “Invest this money in a lower risk instrument – like liquid funds, bank deposits, short- term bonds – which provides quick liquidity as the need has to be completed in the short- term.” About 20-30 per cent of your surplus can be parked here.

Make a long-term commitment. Take an insurance cover as the premiums are lower when you start young. Ravindran adds, “20 to 30 per cent of the balance surplus can be parked in instruments such as public provident fund, national savings certificate, Kisan Vikas Patra or balanced mutual funds to meet medium term goals.”

While it might be hard to plan beyond seven to eight years, you could look at equity investments to fill the long-term need.

4. Adopt a sensible lifestyle. Money power, if not managed well, can lead you into a debt-trap. And plastic money only aggravates this situation. Do not roll over credit card payment as it is the most expensive kind of borrowing. If you spend Rs 5,000 once on your credit card and pay just the minimum balance, you will take 5 years to clear the principal and the interest that gets accumulated.

Track your major expenses on a monthly basis. “Restrict expenses to (a maximum of) 75 per cent of your earnings,” suggests Jain. Income minus savings should be your expense, and not income minus expense, your savings.

5. Be a part of your financial decision making process. Quite often, women leave their financial planning to the father or spouse. Involve your family but be a part of the planning process as it is your financial goal that you are working towards.

6. Retirement planning. This is a long-term plan. It might be a little sketchy as you are just starting your career now. But, set aside a portion of your income towards funding your retirement. A review every 3 to 4 years will help gain clarity.

Clarity in planning and a disciplined approach can ensure a smooth journey towards a financially secure future. So earn, save and spend wisely!

*Names have been changed to protect identities.